Why you should short Snap

Young 'uns gurning for the camera © iStockphotos
Fickle teenagers love Snapchat – for now

Snap’s messaging service, Snapchat, is unprofitable and user numbers are dwindling. 

Over the past few weeks I’ve suggested taking short positions in Netflix and Twitter and recommended that you keep shorting Tesla. All three are overhyped technology stocks trading on huge multiples of their current earnings, while their profit-growth projections are wildly optimistic. The trio are very unlikely to fulfil these hopes. It’s a similar story with Snap, a social-media company best known for Snapchat: a messaging service where the posts disappear after a short time (in some cases after a few seconds). In effect it is a time-limited version of Twitter and Facebook.

The idea is to get around one of the big disadvantages of those networks, namely that photos or messages can hang around forever, possibly embarrassing the user. This feature has given it a following among teenagers as well as those in their early 20s. Since Snapchat went public in March 2017 investors in the company have had a very turbulent ride. Initially, this worked in their favour as the share price surged from the $17 flotation price to nearly $25. However, within a few months the price had dipped below $15. A brief rally at the start of this year soon fizzled out; in the last few days the price has fallen below $10. I think it has further to fall.

Snapchat has a fickle fan base

As I see it, there are three main problems with Snapchat. Firstly, there are now a host of rival messaging services and apps that allow you to send self-destructing messages, including one run by Facebook. Next, the relatively young user-base is noted for being extremely fickle. Indeed, the company was forced to modify a major redesign at the start of the year because it had irritated users; the number of daily Snapchat users slipped for the first time in the second quarter. Its vulnerability to teen whims was shown by the fact that a tweet mocking the service from reality television star Kylie Jenner in February wiped $1.3bn from the share price.

Most importantly, unlike Facebook, the company hasn’t found a way to make enough money from the service to make it sustainable. This is in part due to the nature of the service itself – after all, it’s hard to advertise if your message is going to disappear after a few seconds. Indeed, the parent company is not only still very far away from being profitable, but is burning through nearly $200m in cash each quarter.

Management appears stumped: there has been an exodus of top executives over the past year, with chief strategy officer Imran Khan leaving last Monday. Given the inauspicious backdrop, we suggest that you short the stock at the current price of $9.85. While IG Index allow you to place a minimum of £0.25 per £1, I’d suggest that you put £1 per $0.01 (in other words £100 per $1). I’d put the stop loss at $17.85, which would give you a potential downside of £800.


How my tips have fared

I have seven long positions open. In the last fortnight Redrow has risen to 599p, and Greene King to 502p. This means that my losses on Redrow have now fallen to £84, while I am making £172 on Greene King.

Sadly, my other five longs have fallen. IG Group slipped to 885p (from 907p), Wizz is now £30.65 (from £32.58), Next declined to £54.20 (£55.54), Shire went down to £43.17 (£45.65) and Premier is now 118.75p (121p). The upshot? The net loss on my open long positions has increased from £35.80 to £453.50.

The good news, however, is that the prices of all four of my short positions have declined, boosting my profits greatly. Bitcoin is now trading at $6,311, compared with $7,058 two weeks ago. Thanks to Elon Musk’s eccentric behaviour, Tesla’s share price is now $285.50 ($315.44), just above the $283 at which we recommended shorting it. And Netflix is now $348.41 ($363).

Twitter, which we tipped just two weeks ago, has already fallen to $30.54, making us a profit of £265. Collectively, our short positions are making a profit of £1,397.93, substantially up from £717. If you combine the open longs and shorts you end up with a profit of £943.43.

I’m not going to close out my positions in either IG Group or Bitcoin because they are still making a tidy profit. But I am going to reduce the price at which I cover my Bitcoin short to 8,250 (from 8,500). Note that I don’t adjust prices or profits to account for dividends (like Redrow’s recent announcement of a 19p dividend), although all spread-betting firms do this automatically. Since my long positions tend to be much higher-yielding than my shorts, this means my true profits are slightly higher than the figures stated here.


Trading techniques… seasonal and daily patterns

he annual St Leger Day horse race takes place this Saturday. It is the subject of the famous dictum “Sell in May and go away – don’t come back until St Leger Day.” While this sounds like an old wives’ tale, there is evidence of strong seasonal effects in stockmarkets. In 2002, Professor Ben Jacobsen of Tilburg University and fund manager Sven Bouman found that a slightly modified version of the St Leger’s rule works, with stockmarket returns in the six months from the start of November consistently outperforming the other half of the year in 36 out of 37 countries, including Britain and the US.

Research by Professor Jeremy Siegel of Wharton also found that the day of the week appears to affect returns. Between 1885 and 2012 the best day of the week to invest in the US stock market was Friday, since stocks had strongly positive average returns of 0.06%. If stocks performed as well every day of the week as they did on Fridays, stocks would return an average of 24.5% a year, roughly double the average market return. During the same period, stocks produced negative returns of 0.09% on an average Monday.

Nonetheless, it may be impossible for ordinary investors to take advantage of this “day of the week” effect. There is strong evidence that the daily effect has now disappeared, possibly due to studies pointing it out. Indeed, Siegel notes that between 1995 and 2012 Friday returns had turned negative, while Monday returns were now positive. Most importantly, the transaction costs of buying and selling every Friday would negate any benefit. The bi-annual strategy remains popular among traders, however.