Snapchat falters

September 15, 2017 10:00 AM

Modern Trader provides cutting-edge actionable market research while holding analysts accountable. And, when we publish specific recommendations, we will also let you know how we did.

In our  April cover feature, we took a critical look at the imminent initial public offering of Snapchat (SNAP). While much of the professional analyst world was foaming at the mouth for the most anticipated IPO of the year, our contributor Garrett Baldwin highlighted numerous red flags for the social media darling. The first of which was a structure that did not grant voting rights to the initial investors.

This questionable structure soon bit the nascent social media player. Confirming our outlook and adding to the summer sell-off were index creators S&P, Dow Jones and FTSE Russell’s decision in late July to exclude Snap from its indexes because of Snap’s share structure that denies public investors voting rights. Being left out of the indexes is likely to limit Snap’s growth potential going forward.

Other red flags included its lack of profitability and an apparent lack of a pathway to profitability as well as questions over the veracity of the company’s user growth metrics. But that did not stop prominent Wall Street firms from pounding the table as Goldman Sachs, Citi and Jefferies were among the 12 firms assigning pre-IPO “buy” ratings.

Modern Trader’s pre-IPO feature advised that “investors would be wise to sit out the Snapchat IPO and wait for the market to price the company accordingly in six to nine months”.

Despite the warnings flags, SNAP had a successful rollout, opening more than 40% above its $17 IPO price and rallying above $29 on its second day of trading. However, reality soon set in and SNAP has steadily declined since its March 2 IPO. On June 15, SNAP settled at its initial IPO price of $17 and then dropped another 30% throughout the summer, accelerating on FTSE Russell’s announcement in July, and dropping further to $12 on its Q2 earnings miss (see “SNAPped,” below).

Last month we highlighted how traders may have profited from suggested trades from a series of articles in the December 2016, March 2017 and April 2017 issues of Modern Trader. Author Paul Cretien highlighted the likely fallout from the Brexit vote and how it would play out in currency markets. The broad notion was that countries that compete for exports with Britain would attempt to devalue their currencies, which had grown expensive versus the pound due to the effects of Brexit. Here we point out a specific trade.

At the time “Brexit and the currency wars,” Modern Trader, March 2017, was published, the pound had dropped 15% since June 2016, and appeared to have found a base level. Meanwhile, the Australian dollar had increased more than 5% during that time. The article suggested that selling the Australian dollar and buying the British pound on March 1 would potentially be profitable.
A trader who sold the Aussie on March first could have exited the position on May 10 with a $2,960 profit: 7645 – 7349 = 296 ticks * $10 = $2,960. A trader going long the pound on March 1 at 1.2349 and exiting on May 10 at 1.2992 would have earned $4,018.75.

In reviewing the currency data on July 23, it appears that the same trade might be repeated, selling the Aussie dollar and buying the British pound.   

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