Snap is one of my favorite companies on the market. I believe at some point, it’s going past 100. 

In fact, I thought it was going to happen very soon, which is why I was long the Jan 21 $80 calls coming into earnings. Unfortunately for me, SNAP missed expectations on the earnings report, gapped down 20%, and I got absolutely smoked on the trade.

As always, my risk was controlled using options. I’m a big boy and understand the risk. But taking a huge hit always hurts and this was one of them. It’s all a part of the game. Here was my reasoning for the trade.

Fundamentals

Snap Inc. (SNAP) operates as a camera company in the United States and Internationally. The company offers Snapchat, a camera application that was created to help people communicate through short videos and images. Each of those short videos or images is called a Snap.

After a poor performance post IPO in 2017, where SNAP was just burning money for a few years, it became a turnaround story. In 2019 it began to accelerate its revenue growth, and this trend has continued post-Covid, with year-on-year revenues growing quarter after quarter. 

Notice the revenue growth since the 2019 bottom represented by the red line chart

This turnaround growth has been reflected in SNAP’s stock price. From COVID-19 lows of around $8, the stock was trading around $75 coming into this earnings report, a price gain of over 900% during this time.

I like to trade with the trend. I believe it is a trader’s job to get long strong stocks and short weak stocks. Snap’s revenue was growing, and the chart looked great.

Technicals

SNAP was forming a nice support at the $70 level, which was a significant prior resistance level. At this level, in my eyes, SNAP was very cheap as I had expected the gap from previous earnings (which I had done well in) to hold and for SNAP to make a run towards $100. In my experience, this is how strong growth stocks have traded in the past. 

All my fundamentals and technical levels had lined up, and this was one of my favorite trade ideas. Then the Earnings Release came out, and I was completely wrong!

Earnings

Snap Q3 Adj. EPS $0.17 Beats $0.08 Estimate, Sales $1.07B Miss $1.10B Estimate

SNAP beat on the bottom line but missed on revenues. What really sent the stock cratering was the guidance.

Snap Sees Q4 Sales $1.165B-$1.205B vs $1.36B Est.

It missed the expected 4th quarter guidance by more than 10%, and the stock opened down 20%

My options fell from a price of $5.50 before the earnings report to $1.10 afterward. As always, my risk was controlled using options. I’m a big boy and understood the risk. But taking a huge hit always hurts, and this was one of them. It’s all a part of the game. 

Bottom Line

Not every trade is a good one. Even the best traders in the world have losers. I liked everything about SNAP coming into earnings, the fundamentals, the technicals the product. 

Unfortunately, bad guidance led to a 20% gap down in the stock overnight. I understood the risk, but a big miss like that still hurts. Despite this miss, I still love SNAP over the long term. I am now closely watching it for the technicals to setup again so I can get back in the trade. It’s not how hard you hit, but how hard you can get hit and keep on moving!