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Snap Inc. (SNAP) stock has shown unusual call options activity as seen in a Barchart report today. This could be a signal that investors are moving bullish on SNAP stock. SNAP is up 1% today in morning trading at $15.76 per share, but up over 38% ($11.40) since reporting its Q1 results on April 25.
One reason is that Snap reported it had another positive free cash flow (FCF) quarter in Q1. SNAP said its Q1 revenue was up 21% Y/Y to $1.194 billion and FCF was positive $37.9 million.
This was the second in a row of positive FCF results for the company, although the prior quarter was higher. That quarterly downturn is likely due to seasonal (year-end) cash flow activity and is not necessarily unexpected.
This can be seen in a chart that Snap put in its quarterly deck. It shows that in the past six quarters, the company has had positive FCF, although lower in the most recent quarter.
Nevertheless, the CEO, Evan Spiegel, said in the conference call that after cutting expenses SNAP is diversifying its revenue and scaling its capex investments to “deliver meaningful and sustained profitability and positive free cash flow.”
Bullish Call Option Investors
The heavy options activity can be seen in Barchart's Unusual Stock Options Activity Report today. It shows that there were 5,782 call options contracts traded at the $16.00 strike price level for expiration on June 7.
That strike price is just 1.5% over today's spot price for an expiry period that is 23 days away. This heavily implies that the initiating investors are likely bullish buyers of the calls as the strike price is only 27 cents over the spot price is not much. Moreover, the premium paid of 59 cents in the midprice, plus the strike price width of 27 cents, or 86 cents total, represents a 5.46% height over the existing spot price of $15.73.
In other words, bullish investors may believe that SNAP stock could rise to at least $16.59 by June 7, assuming the call buyers hold their contracts until expiration.
On the other hand, look at this from the short seller's standpoint. They stand to make an immediate yield of 3.56% if they are selling covered calls (i.e., $0.56/$15.73). Moreover, if the stock rises to $16 on or before June 7, they will have a total return of 5.28% (i.e., $16.56/$15.73-1). That is also a good return.
Keep in mind that these short sellers could be bullish on the stock. They may believe that it could rise to over $16.00 and are willing to sell their shares for a 5.28% total return. That would especially be the case if these covered call sellers have held the stock since April 25 or earlier. That implies at least a 40% potential gain in their holding over the next month.
Analysts Are Bullish
One reason that the stock is doing well is that analysts are generally positive about the company's turnaround. For example, AnaChart.com, a new sell-side analyst tracking service, reports that the average price target of 38 analysts is $18.95 per share, or 20% over today's price.
Granted, SNAP is not ostensibly cheap here. For example, it trades at 62 times projected earnings per share (EPS) of 25 cents for the year ending Dec. 24. For 2025 the multiple is 36.6x EPS estimates of 43 cents.
Target Price Using FCF Yield Metric
But let's look at it from an FCF standpoint. Let's assume Snap can generate 4 positive free cash flow quarters over the next 12 months (NTM) and make an average FCF margin of 8%. Analysts project 2024 revenue of $5.36 billion in sales this year and $6.16 billion next year, or an average of $5.76 in NTM revenue on a run rate basis.
Therefore, using an 8% FCF margin over the NTM period, Snap could generate $461 million in FCF. That could lead to a much higher stock price.
Here's how. Let's assume that the market will give the stock at least a 1.25% FCF yield. That assumes that the company pays out 100% of its FCF as a dividend and the market gives it a 1.25% dividend yield.
Therefore, dividing $461 million in NTM FCF by 1.25% results in a $36.88 billion market valuation. That is 41.8% over its present $26 billion market cap. In fact, even with a 1.5% FCF yield (the same as multiplying NTM FCF by 67x) results in a $30.7 billion market cap. That is 18% over today's market value.
In other words, SNAP stock could be worth $18.56 per share (18% higher than today's price of $15.73). That is why analysts surveyed by AnaChart likely have an 18.95 average price target.
The bottom line is that today's call options traders are likely bullish on SNAP stock.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
