Chart of the Day – $ZU: Zulilly Launch Pad?

by Dan August 6, 2014 3:00 pm • Commentary

The online retailer Zulily (ZU) reports their third quarterly results as a publicly traded company today after the market close.  The options market is implying a whopping 16% one day move, which is actually shy of the average over the last 2 quarters of about 33% (the last report, the stock went down 29.66% on May 6th, and prior to that, up 36.34% on February 24th).  Obviously this is a fairly small sample, which could be one reason why options market makers are pricing the move well below recent history, but it strikes me as a bit odd for a recent ipo with a stock that has short interest at its all time highs, nearing 50%.

I suppose ZU bulls will argue that the e-tailer that sells stuff for babies and children is somewhat recession-proof as peeps don’t skimp on their kids and their pets, but I would also suggest that this is the exact sort of stuff that Amazon does very well selling at very slim margins with free delivery.

Analysts are fairly positive on the stock with 5 Buys, 3 Holds and 1 Sell with an average 12 month price target of about $49, or up 25% from current levels.  Earnings and sales growth estimates for the $4 billion market cap company are fairly rosy, with eps expected to grown 100% this year and next (albeit off of a low base) and sales growth of 73% and 47%.   Not bad for a company that is expected to pass the $1 billion sales mark this year.  Stock is not cheap, but given the size of the company, the potential for market share gains, while it is not a slam dunk at less than 3x sales, it is outrageously valued either.

The chart since the November 14, 2013 IPO at $22 is quite fascinating.  Aside from the two earnings gaps, the stock has either flat-lined, gapped or descended hard:

ZU since 11/14/13 IPO from Bloomberg
ZU since 11/14/13 IPO from Bloomberg

This is a very speculative situation from both a technical (48% short interest and huge earnings gaps) and a fundamental (the high expected sales and EPS growth over the next few years is a shot-in-the-dark guess at the moment) basis.  With that in mind, the options are by no means expensive, and even options market makers are not sure where to price the situation, as the options bid/ask is extremely wide.

In today’s trading I have seen some speculation into tonight’s print where a trader paid $6.25 for 500 of the Aug 8th weekly 39 straddles (bought the call and the put).  In this trade the break-even is 45.25 on the upside, and 32.75 on the downside, or about 16% in either direction.

I have no clue which direction the stock is going or if it will or will not outperform the implied move, but I will say this, to buy the move, time will not be on your side, which is one reason why we generally like selling the weeklies at the implied move, and buying longer dated options.  We have no axe in this one and will avoid as the margin for error appears thin.