This week, Cabot Profit Booster features a top new-economy recommendation in the fast-growing social media space whose stock is just short of its all-time high.
Cabot Profit Booster 157
As a reminder, January option expiration is this Friday (January 15). Because of this, Friday morning I will update you on where we stand with our two January positions (UBER and ADNT), both of which are in good shape, but may need some attention.
This week, Cabot Profit Booster features a top new-economy recommendation in the fast-growing social media space whose stock is just short of its all-time high. Here is the stock, and our covered call trade:
The Stock – Snap Inc. (SNAP)
Why the Strength
For many in the 13-to-34-year-old demographic, Snapchat has replaced texting as their preferred communication tool. The social media app’s popularity can be seen in its growing daily active user count, which rose 18% to 249 million in Q3. Snap saw strong retention in the latest quarter and its reach has been stellar—over 90% of the Gen Z population and 75% of Gen Z and millennials in the U.S., the U.K. and France use the app! (Users also increasingly use Snap to watch premium sports content online, including the NBA.)
Average revenue per user, meanwhile, increased 28% to $2.73 in Q3, which is a big part of the story—despite recent upticks, Snap’s revenue per user remains far lower than other social sites, so the potential monetization upside is big.
All in all, sales growth re-accelerated in a big way in Q3 (up 52%, the fastest growth seen in a long time), and while the bottom line is still in the red, Snap saw Q3 EBITDA come in at $56 million (up around $100 million from the year-ago figure). When Snap’s Q4 results are reported on February 9, analysts expect revenue to be around 51% higher, along with a seven cent per-share profit.
Snap is in good position no matter what happens with the pandemic, as more stay-at-home activity should continue to goose user growth while a return to economic normalcy should have advertisers opening up their wallets. Big picture, advertisers are looking for other avenues besides Facebook and Google to capture buyers, and Snap is one of the main beneficiaries.
Technical Analysis
SNAP rebounded back nicely from March’s crash, but it was the stock’s earnings gap in October (up 28% on 13 times average volume) that was the real coming out party, with shares busting loose from a three-month rest.
Since then, SNAP has done decently, albeit with some pullbacks along the way, but the recent action looks buyable—the stock tagged its 10-week line for the first time last week, and it’s bounced nicely since. We’re OK taking a swing at the stock here or on weakness. Stop — 47
The Covered Call Trade
Buy Snap Inc. (SNAP) Stock at 55, Sell to Open February 55 Strike Calls (exp. 2/19/2021) for $5.00 or a Net Price of 50 or less
Static Return: $500 per covered call (10%)
Breakeven: 50
Covered Call Return (if assigned): $500 per covered call (10%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, of 50 or less. (In this case 55 minus 5 = 50. Or another example is you could pay 54.75 for the stock and sell the call for 4.75, which also equals 50)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
The next Cabot Profit Booster issue will be published on January 19, 2020.