Event: TWTR reports its Q3 results tonight after the market close. The options market is implying a one day move in either direction of almost 14%, which is shy to the three quarter average of about 17.5%. This is TWTR’s fourth earnings report since becoming a publicly traded company eleven months ago.
Sentiment: Wall Street analysts remain fairly mixed on their outlook on TWTR shares with an average 12 month price target of about $55, about 10% higher than current levels, with 18 Buy ratings, 18 holds and 5 Sells. Short interest sits at about 5% of the float, nearing the lows since its Nov 2013 IPO.
Open Interest: Total open interest is skewed towards calls over puts by a ratio of 1.25 to 1. The recent 1 month average volume has been much more skewed, favoring calls by a ratio of 2 to 1. The Nov 50 calls and the Jan15 50 calls have the most open intreats of relevant strikes, at around 20k each.
Price Action / Technicals: The price action in TWTR since its IPO almost a year ago has been fascinating. $50 is a fairly important technical level from a sentiment stand point for two reasons. First, it was the high for the stock on its very first trading day after the IPO. Second, it marks nearly the mid-point between the all-time high made in the stock in late 2013, and the low made in May 2014:
From where I sit, I see little overhead resistance until the high $50s and little downside support until the low $40s. The consolidation in and around $50 since early September is encoraging, but after the one day decline of nearly 10% on October 10th, momentum appears to be waning.
It’s important to note that despite the stock’s $20 bounce from the lows in May, it remains down 22% on the year. That negative performance year-to-date could have implications in the event of a worse-than-expected report. As we head into year end, some large portfolio managers may not wish to show such a large decliner as a holding.
Volatility Snapshot: Given that TWTR has less than 1 year of trading history, options traders have not had much time to assess the earnings volatility of the stock. 30 day implied volatility is close to where it was prior to the last earnings event in July:
TWTR implied volatility is likely to fall steeply, back into the mid-40’s after the event.
Our View: TWTR has been on our list of potential longs since the summer. We exited the second half of our long position in early October for a nice gain. The main difference between TWTR today vs. ahead of the earnings report in late July is that the expectations from the market are higher to go along with the higher stock price. While the EPS expectation is still only 0.01, the revenue expectation is for around $350 million, or nearly 15% higher quarter-over-quarter. More importantly, guidance will be crucial as analysts have modeled in a 4th quarter revenue number of nearly $450 million, which is 85% higher than the 4th quarter of 2013.
In addition to the higher bar, the $50 level has acted as a magnet for the stock. As a result, we have much less of a directional view from a technical or fundamental standpoint for this quarter.
* 3Q adj. EPS est. 1c (range 1c loss/shr-3c EPS)
* 3Q rev. est. $351m (range $332m-$378m); July 29, TWTR
* 3Q Ebitda est. $52.8m (range $41.7m-$63.2m); TWTR forecast
adj. Ebitda $40m-$45m
* 3Q avg monthly active users est. ~284m (7 ests.); ~13m net
adds vs 2Q
* 3Q avg timeline views/MAU (TLV/MAU) est. ~632 (5 ests.)
* 4Q rev. est. $448.1m (range $415m-$506m)
* 4Q Ebitda est. $98.9m (range $78.8m-$133m)
* 2014 rev. est. $1.36b (range $1.31b-$1.42b); TWTR forecast
* 2014 Ebitda est. $242.9m (range $216m-$286m); TWTR forecast
adj. Ebitda $210m-$230m
* NOTE: In 2Q, TWTR had 271m avg. MAUs, 211m mobile MAUs and