Second look at SNAP and a spread trade with PSTG 06-19-2017

I initially wrote about SNAP during the time of it's IPO and now it's time to take a second look at SNAP. Let's quickly go through the timeline of what I was thinking since SNAP's IPO leading up to now.

My SNAP Twits Timeline

$SNAP "it may be a better idea to watch few Snap earnings results rather than paying this exuberant premium now" see http://blog.buysellshortcover.com/should-you-avoid-snapchat-for-now-or-jump-the-gun/?src=stw-rp

— Saadey(साँढे) (@saadey) Mar. 7 at 01:48 PM

$SNAP I was looking at Snap 2 days after IPO and thought it was overpriced & investors should wait a few earnings. http://blog.buysellshortcover.com/should-you-avoid-snapchat-for-now-or-jump-the-gun/?src=stw-05-10-2017

— Saadey(साँढे) (@saadey) May. 10 at 04:51 PM

$SNAP 1 theory - book runners can't keep this afloat until ER so they turn to analyst for help. If that don't work, big fund managers next?

— Saadey(साँढे) (@saadey) Mar. 27 at 08:31 AM

$SNAP When Snap started to tumble after IPO hordes of analyst came with high $29 price target. Where are they now?

— Saadey(साँढे) (@saadey) May. 10 at 06:20 PM

After three months and dismal earnings this is where we stand and here is another prediction that I've recently made.

$SNAP Bold prediction-below $10 will present buying opportunity, by then Snap will likely figure out how to monetize & be profitable.1.5 yrs

— Saadey(साँढे) (@saadey) Jun. 16 at 07:33 AM

As you can see, SNAP played out as a classic example of how analysts and book runners work harmoniously to portray a rosy narrative in the mainstream media when the short term investors confidence and exuberance start to diminish to keep the price afloat till it serves them. However, they can only do so much. Sorry folks! this is just how the Tech IPO game is played. You can either stay on the sidelines or learn the rules of the game if you wish to participate.

SNAP which bills itself as a Camera company may never become profitable. Don't take my word for it. You can read it in their prospectus from S-1 filing.

S-1 filing included a cautionary statement that suggests the company may never achieve or maintain profitability

While companies put cookie cutter line items in their prospectus to better protect themselves from lawsuits as risk disclosures, I however think that just like it took Facebook some time to figure out how it can monetize, it will take SNAP similar time as well if not more. I see few likely outcome for SNAP within 1 or 2 years -

  • Become profitable.
  • Get bought out.
  • Neither here nor there like Twitter. Expect management shake up, activist investors etc.

While all this is happening, I am predicting that SNAP will disappoint for couple more earnings unless they can pull a rabbit out of the hat that somehow re-sparks the growth narrative at an even higher magnitude. Below $10/share, I'll be looking for a buying opportunity once SNAP figures out how to obtain profitability with their current user base even with declining growth.

With that view in mind, we will be looking at a spread trade idea that I'm exploring to execute with a 3 - 6 month timeframe at minimum and even longer if the trade goes in my direction. More on that later...

First let's take a look at SNAP's weekly chart. We see a nice steady decline week over week with lower highs formation.

snap-weekly-chart-06-18-2017

We may see a short term push to $18 before the bears take control and push it to low teens. If that doesn't happen and the prices goes through $21.50+ then we must undersatnd something else has started to brew short term.

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Enter Pure Storage (PSTG)

I've written about Pure Storage in the past and how data storage is going to be a rapidly growing sector and it's going to continue to grow. Pure's competition Nimble Storage (NMBL) got gobbled up by HP in March this year.

Company wants to reach a goal of $2 billion in annual revenue by 2021. Recent earnings beat followed by up beat guidance have been well received by investors and traders alike when looking at price action. Technically, stock has started to show sign of life and Elasticity is positive and sustaining. Consecutive Days Elasticity is right now 16 and expect this to continue staying positive. We're looking for strong demand to continue and positive price action as a confirmation to further upward mobility.

Why use PSTG as a spread trade you wonder? My view on data storage is bullish. The amount of data companies now generate are astronomical. As long as the internet exists, there will always the need to store, safeguard and retrieve data fast. Data storage companies will still be in business long term.

PSTG-06-18-2017

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Spread Trade

Let's create a spread trade where we try to hedge the market and Tech sector risk by going long PSTG and short SNAP. Usually you will take a pair trade with stocks that have a connection between them or things in common. For example, both stocks are in the same sector and competing in the same space and one has a good execution track record while the other is overvalued. In this case the only thing that's common is both SNAP and PSTG belong to Tech sector. Not the best pair but a hedge nonetheless.


You can either use stocks or options for this trade. I would most likely use options with 3 - 6 months time horizon at minimum. The hope is to beat the sector and the market returns. Tech sector has been on a bull run since past one year and will likely continue despite the recent rumble couple of week ago. We will be closely monitoring the sector to see if it starts to show signs of finding a top by printing lower highs.

Here is what the spread ration looks like for PSTG and SNAP since SNAP IPO.

PSTG-SNAP-Spread-Ratio


A nice higher lows and the trend towards the upside and we're seeing a positive price action looking at the spread. Here are the entries I'm looking for to time my trades.

  • SNAP - A quick run up next week followed by similar magnitude of sell off weeks after that maintaining it's lower highs formation. Anywhere between $18 - $19.50 would be a good short entry. Risk would likely be around low $20s.

  • PSTG - Either looking to enter around $12.50 as a starter position or going full position after $13.50 break. Risk would likely be around high $11 area.


That's it for now folks. I hope you found this blog post informational. Happy and Profitable trading for next week.

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Image credit - technewstoday.com| disclaimer.

Saadey (साँढे)

compsci background, high perf software engineer by profession, fintech fanatic, entrepreneurial, food lover, soylent, traveler, NBA fan, geek, and avid learner.

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