Event: TWTR reports its Q4 earnings today after the close, its first earnings report since going public in early November. The options market is implying about a 15% one day move, with no prior earnings history on which to base that implied move. Twitter’s largest one-day move so far as a public company (excluding its first trading day) was its 13% decline on December 27th.
Sentiment: Wall Street analysts are actually quite negative on Twitter’s stock, a rarity among tech analysts for such a strong stock. The stock has 7 buy ratings, 13 holds, and 12 sells, with an average 12 month price target of $50. Short interest has steadily climbed higher since the IPO:
With short interest now around 32 million shares, that’s around 40% of the free float of 80 million shares. Granted, the total number of shares outstanding is 555 million, but the float is much smaller.
TWTR stock is up 4% so far in 2014.
Options Open Interest: Calls and puts are evenly split among total open interest, with about 491,000 calls and 492,000 puts outstanding. The 1 month average options volume has been more skewed towards calls, by a ratio of about 1.45 to 1. Among weekly options, the weekly 55 puts have the most open interest of nearby strikes, at over 11k.
Among Feb22nd options, which have the most open interest, calls dominate. The Feb22nd 75 calls have over 40k of open interest, and the Feb22nd 85 calls have over 20k of open interest. The June 50 puts are the only other line with over 20k of open interest.
Price Action/Technicals: TWTR has only been public for about 3 months, but the stock has had quite the range in such a short period of time. The stock’s high on the day of its IPO was $50.09, and TWTR remained below that level until its breakout on December 10th. For the last 6 weeks, TWTR has traded between $54 (green) and $75 (red):
The stock is currently in the middle of those two levels, with a flat 20 day moving average indicating indecision after the very strong move from $40 to $75 between late November and late December.
The weekly straddle is implying around a $10 move on earnings, which would take the stock to near the higher or lower end of that $54-$75 range.
Fundamentals/Valuation: Given that this is TWTR’s first earnings report, the entire investment community will be focusing intently on the details of the business and management’s outlook and discussion during the conference call. Interestingly, most analysts expect very robust growth in the platform, but are still pessimistic on the stock itself based on valuation.
Here is Bloomberg’s preview, detailing some of the specific analyst commentary:
- 4Q adj. loss/share est. 2c (range loss/share 13c – EPS 4c)
- 4Q rev. est. $217.8m (range $195m-$238m)
- 4Q gross margin est. 68.1% (est. 65%-72.8%)
- 1Q adj. EPS loss/share est. 3c (range loss/share 8c – EPS 3c)
- 1Q rev. est. $215.6m (range $184m-$249m)
- 2014 adj. loss/share est. 3c (range loss/share 14c – EPS 12c)
- 2014 rev. est. $1.13b (range $954m-$1.36b)
The metrics to watch are user growth and revenue growth, and the market will be focused on management’s strategy for further monetization going forward.
Volatility: Implied volatility in TWTR is quite high for a $38 billion market cap company. That’s largely due to the high level of realized volatility since TWTR went public, with the company’s 50 day realized volatility at 73. In other words, TWTR has been moving an average of about 4.5% per day since its IPO. Here is the chart of implied vol:
Though it has actually inched lower in the past month as Twitter stock has respected that 55 to 75 range, it’s still high on an absolute basis, at around 80. If the earnings report gives some clarity to the market, we expect implied vol to move down into the 60’s.
Our View: TWTR’s options pricing is rare for a company this large, and it’s there that we see a potential opportunity. As Dan laid out in his Name Trade Trade post on Friday, the high level of implied volatility is a crucial consideration for any trade structure:
For newbies to the options world, the chart above makes outright purchases of near dated options for directional purposes into next week’s event a very difficult proposition to make money. You would need quite an outsized move given the high options premiums.
With that in mind, he proposed an idea for those looking for a retest of the $75 high from December. Even for those without a strong directional bias, however, there might be a trade opportunity given those high premiums. We are looking at potential short volatility structures, and will update later today if we see anything that stands out.