Event: GRPN reports its Q2 earnings tonight after the close, the options market is implying about a 25% move (with the stock at about 7.50 and the Aug 7/8 Strangle offered at 1.60, you would need the stock at or below 5.40 or at or above 9.60). In mid-May when the company reported Q1 the stock initially gapped up close to 28% only to close up 3.87%. After their first qtr as a public company that was reported in February, the stock was down close to 14%, so limited but volatile history.
Sentiment: Wall Street analysts have become a tad less optimistic of late on the stock with 9 Buys, 13 Holds and 3 Sell ratings and a 12 month avg price target of $15, 100% higher than current levels, and 25% below its November 2011 IPO price. Short interest sits at 16% of the float, which frankly I expected to be higher.
Price Action: Since reporting what initially appeared to be a blowout Q1 back in mid-May, GRPN shares saw a 50% gain at one point btwn the day of earnings and the opening gap higher. The stock has since been essentially cut in half on concerns about the quality of the growth and fears of deceleration due to economic headwinds and competition. Looking at the chart is essentially useless as the stock has basically been in a massive downtrend since the opening gap to about $30 on its IPO day to its current levels which sit about a buck above the all time lows.
Volatility: It’s tough gauging historical volatility in a stock that was in the 20’s but is now single digits as the past isn’t that helpful for what are now dollar cheap options. Here’s a look at the past year of vol moves. As one would expect, the implied volatility (red) across all months is trending higher over time as the stock gets lower in price. This earnings will see the highest IV of any of its previous events in the short history of the stock.
You can see what happens in a low dollar volatile stock going into an event as the implied vol in the Aug18 weeklies is around 300. For comparison, the October options are about 120.
Expectations:
Q2: EPS= .03, Revs= $575M (Guided $550-$590M)
Q3: EPS= .05, Revs= $607M
2012: EPS= .18, Revs= $2.4B
MY VIEW: Frankly I don’t have a strong view on this company aside from the fact that I would never use their products, and from what I can tell the people around me who were once big proponents of the product are much less so now than they were a year or 2 ago. I have long thought that the offering smacked of a fad as the next new thing on the web, and that the barriers to entry were not very high.
Late last year we put on what we call the “Terminal Short” structure on GRPN, the long dated 10×5 1×2 Put Spread when the stock was $22.43 and last month took the balance of the position off when the stock was down more than 50% from the those levels.
At this point it is hard to be too negative on the stock with a short term time horizon. Unless we get a massive cut to forward guidance, I have to assume that there is a good bit of bad news in the stock at current levels, especially when you consider the stock’s recent plunge in sympathy with FB and ZNGA (while having nothing to do with either company aside from the recent IPO status and dumb valuation and similar holders).
BUT the extremely high implied move may provide near term trading opportunities, check back later as we are looking at ways to play.