Quick Note: Our offices will be closed next Monday for Martin Luther King holiday, so your next Cabot Profit Booster issue will be sent to you on Wednesday, January 17.
2024 got off to a somewhat rocky start as the S&P 500 fell 1.8%, the Dow lost 0.6% and the Nasdaq lost 3.5% last week. And while the indexes fell there is rarely much to learn from the first week of the year as it is routinely “wonky,” with traders rotating from one sector to the next, and tax-related trading moving money out of recent winners.
The Stock – Snap (SNAP)
Why the Strength
Snap’s flagship product is Snapchat, a camera-centric app for sending messages and posting to social media. The company enjoyed a modest revenue rebound in the latter half of 2023 after sequential declines the first part of the year due to the digital ad recession and the loss of many content creators after Snap dropped a revenue-sharing program in 2022; Q3 sales ticked 5% higher and Q4 is estimated to be up about the same, though on the flip side, monthly active users are growing faster, rising about 12% to 750 million.
While there’s a sense Snap could have done better last year given the upheaval at Twitter and the concerns around TikTok’s Chinese ownership, the company has some strengths that could get the key revenue-per-user metric rising again. Mainly, it’s the estimate that 90% of 13-to-24-year-olds, and three-quarters of the 13-to-34 crowd, in 20 countries use Snapchat at least once a month, a demographic many marketers want to reach, which means demand should have a high floor. Even with that large, young user base, there is runway to get more people using Snapchat since that young demographic represents at most 20% of all mobile phones in any market.
Overall, the big attraction (prompting upgrades from a couple of analysts recently) is expectations that the digital ad market will rebound nicely this year, helping to drive slightly accelerating revenue growth in the quarters to come (up 13% for 2024 as a whole).
That said, there’s also a nascent subscription angle here as well, with its Snapchat+ offering ($4 per month, or $30 per year) providing frequent users a bunch of added features and already having north of seven million sign-ups. Longer term, CEO and founder Evan Spiegel believes the camera will be the easiest gateway to internet searches and communication between families and friends, given its ease of use compared to text. Even with hiccups, the business is profitable, and given the stock action, it’s a good bet that this year’s 16 cent per share earnings estimate will be conservative.
Technical Analysis
SNAP spent two years in the wilderness, tumbling from its peak of 83 in October 2021 to a low under 8 in late 2022—and then gyrating up and down for another year, with shares still trading near 8 in October. But following an ugly reversal on earnings, shares not only got going but acted beautifully from November through mid-December, with an accelerating uptrend to nearly 18 before the recent wobbles. Stop — 14
The Covered Call Trade
Buy Snap (SNAP) Stock at 17.50, Sell to Open February 17 Strike Calls (exp. 2/16) for $2, or a Net Price of 15.50 or less
Static Return: $150 per covered call (9.67%)
Breakeven: 15.50
Covered Call Return (if assigned): $150 per covered call (9.67%)
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, or 15.50 or less. (In this case 17.50 minus 2 = 15.50. Or another example is you could pay 17.35 for the stock and sell the call for 1.85, which also equals 15.50)
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
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
The next Cabot Profit Booster issue will be published on January 17, 2024.
