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EQIX $89
EVENT-Report q4 earnings tonight after the close
–implied move in options market is about 8.5% vs the avg move over the last 4 qtrs at ~5.25% (this does not include the ~33% sell off in Oct when the company negatively pre-announced their q3 results)
Price Action:
-stock is up almost 10% ytd…..helping to fill in almost 2/3 that gap from the Oct disaster….
–Interesting trade yesterday, an investor Bot the Feb 90 puts and sold the Mar 80 puts to open 5000x
Fundamentals/Sentiment:
–company lowered guidance for q3 based on what they call “underestimated churn assumptions” plus a whole “host” of other mishaps including “greater than expected discounting to secure longer-term contract renewals”…when i hear stuff it just reinforces my long held theory that companies will lie to their investors when ever they have the opportunity too….during the run up from early 2009 of $40 to its high of $105 in late 2010 it appears tats exactly what they did….OVERESTIMATED a lot of the metrics in which they forecast their business…….
-even with a deluge of downgrades after the Q3 pre-announcement, the street remains bullish with 18 buys, 10 holds and only 1 sell.
-short interest in the name is only 15% of shares outstanding which compares to almost 6% in rival {FFIV} which has double the market cap.
MY VIEW:
-Again this falls in the camp of check your head to short, even with stretched valuation and questionable management a $4bil “cloud company” (that expression makes me ill when u consider how bricks and mortar their biz is) could be an easy acquisition target for a cash rich tech company like {GOOG},{MSFT} or {CSCO}.
**USE OPTIONS TO EXPRESS CONTRARIAN BEARISH VIEW INTO TONIGHT’S EARNINGS.
TRADE STRUCTURE: BUY the FEB 85/80 PUT SPREAD for ~1.10 or less than 1.5% of the underlying
-Buy 1 Feb 85 Put for 2.00 and
-Sell 1 Feb 80 Put at .90
BREAK-EVENS on FEB exp:
–stock 85 or higher you lose the $1.10 premium you paid
–stock btw 83.90 and 85 you can lose up to $1.10
–stock btw 83.90 and 80 you can make up to $3.90
–Stock below 80 (-10% a little above the implied move you make $3.90 or almost 4x your money)
UPDATE: After posting in-line earnings and reiterating 2011 guidance last night the stock is up ~1.5% as of 10:50 am. I would say this move in some ways isnt that impressive given the number of defenses of the stock this morning, but in other ways kind of impressive when u consider that AKAM a similar name in a similar space with a similarly ridiculous valuation is down 16% following its in-line qtr and disappointing guidance…..that said if you paid ~1.10 yesterday for the EQIX Feb 85/80 put spread you may want to consider selling it for ~.30, as the only reason to hold this position at this point post earnings is if u feel the stock could drop at-least $5 (below the 85 strike you are long) between now and next Friday (expiration). This trade suggestions was clearly a punt on the short side, but i still like it better than being short the stock. You defined your risk reward and if sold here lost less than 1% of the underlying to have a short bet on for earnings.[/private][/private]