Event: Twitter (TWTR) reports Q3 results tonight after the close. The options market is implying about a 12% one day move tomorrow. The Oct 30th weekly 31 straddle (the call premium + the put premium) is offered at $3.90 with the stock at $31, if you bought that you would need a move by Friday’s close above $34.90 or below $27.10 to make money, or about 12.5% in either direction.
Since going public in November 2013, the company has reported 7 times, with an average post earnings move of 16%, five moves lower and two higher.
Sentiment: Wall Street analysts are fairly mixed on the stock with 16 Buy ratings, 25 Holds and 3 Sells, with an average 12 month price target of $37.20, or about 20% higher than current levels. Short interest has come down int he last month since the CEO announcement, now at about 10% of the float.
Price Action / Technicals: Despite the stock’s 30% gains from its one month lows, the stock is still down 13% on the year, and down 42% from its 52 week highs made in April.
To suggest that the stock is just above a crucial support level at $30 is an understatement:[caption id="attachment_58018" align="aligncenter" width="600"] TWTR since Nov 2013 ipo from Bloomberg[/caption]
What’s also clear is that there is little overhead resistance until you get back up to $36/$37.
Volatility SnapShot / Open Interest: 30 day at the money implied volatility is nearing levels that place it near the highs of the year at 70%, which is unusually high for a $21 billion market cap company:[caption id="attachment_58019" align="aligncenter" width="600"] TWTR 30 day at the money implied vol since 2013 ipo from Bloomberg[/caption]
As for options open interest, it’s recently come off of one year highs, but calls outnumber puts almost two to 1:[caption id="attachment_58020" align="aligncenter" width="496"] TWTR total options open interest from Bloomberg[/caption]
Fourteen of the top fifteen strikes of open interest are calls, with the two largest 137k of the Jan17 35 calls, 110k of the Nov 30 calls, and the largest put strike 105k of the Nov 30 puts.
Expectations: RBC Capital’s Internet analyst Mark Mahaney highlights the following items to focus on in note to clients:
1) User growth and engagement – Twitter grew MAUs 15% Y/Y in Q2 to 316MM, decelerating 4 points from Q1 growth rates. We anticipate a 2-point decel in Q3, and are estimating that Twitter’s global user base grew 13% Y/Y to 323MM MAUs, implying 7MM Q/Q Net Adds vs. 13MM in Q3:14.
2) Revenue growth trends…especially advertising – Advertising revenue, which makes up ~90% of Twitter’s total revenue, grew 63% Y/Y in Q2:15, above Street expectations. We
expect to see continued deceleration over time and in Q3:15, we likely conservatively forecast 59% Y/Y growth to $509MM on a 20-pt easier comp.
3) Monetization gap – Twitter monetizes its users at a much lower rate than Facebook but is steadily closing this gap. Twitter generated $1.43 for every MAU in Q2:15 compared to $2.61 for Facebook. However, Twitter grew its monetization 41% Y/Y compared to Facebook’s 26% Y/Y growth
Estimates & Forecasts from Bloomberg:
- 3Q adj EPS est. 5c (range 1c-7c)
- 3Q rev. est. $559.9m (range $550m-$568m), co. forecast at least $560m on Oct. 13
- 3Q monthly active users (MAU) est. 324m, implying +2.5% q/q
- 3Q adj. Ebitda est. $117.1m (range $112m-$127m), co. forecast at least $115m
- 4Q rev. est. $741.7m
- 4Q adj. Ebitda est. $198.0m
- 2015 rev. est. $2.24b (range $2.14b-$2.28b), co. forecast $2.2b-$2.27b on July
- 2015 Ebitda est. $539.3m (range $523m-$561m), co. forecast $520m-$540m
Our Take: We have been fairly steadfast on our view that despite TWTR’s weak user growth and challenged engagement, it remains a very unique social media property whose $21 billion market cap ($19 billion enterprise value) does NOT reflect its scarcity value, especially when you consider Facebook’s 2014 purchase price of $22 billion for WhatsApp, and the ever-growing private market valuations of so called “unicorns” like SnapChat.
As for expectations, TWTR had a lot of news last month, starting with the Oct 5th resolution to their CEO search where (despite some external concerns) the board agreed to re-tap co-founder Jack Dorsey as CEO while he retains his role as CEO of online payments company Square that is currently preparing for an IPO. The company also announced that former Google exec Omid Kordestani would join as Chairman. Dorsey got to work fairly quickly with a workforce reduction and the launch of Moments, which is a feature that the company hopes will dramatically assists user engagement.
So investor sentiment went from downright disastrous in September to possibly a tad too optimistic for material improvement in the metrics that mean the most to Wall Street. I would say though that if you have been long the stock for most of the year as we have, there should be little by way of disappointment that should not be expected in forward guidance, as it makes perfect sense that the new management team would set expectations that they know they can beat. So unless forward guidance is far worse than the low end of expectations, then I see little reason why investors would hate sell shares on a weak quarter and guidance.
Potential Trades: Last week in a post titled $TWTR – It’s just Bird to me I expanded on a bullish mention from Barron’s that highlighted put sales as a way to express a bullish view. Here was my take at the time when the stock was in the same spot:
I am long the stock. One strategy I’d consider to add leverage to my existing long (if I thought the worst was behind TWTR and that next week’s earnings event could serve as an explosive positive catalyst) would be a bullish risk reversal. This strategy includes a put sale as Sears’ suggests, but using the proceeds of the put sale to buy an upside call. For instance as of Friday’s close you could sell the Nov 27 put at 85 cents and use the proceeds to buy the Nov 36 call for 85 cents. On Nov expiration there are no gains or losses between $27 and $36, losses as if long stock below $27 (down 13%) and gains above $36 (up 15%) as if long stock. This is a low conviction bullish leverage overlay, but it’s a matter of how much risk a long holder is willing to add to an existing long into a potentially volatile event (to increase the probability of long participation one would need to tighten strikes closer to existing stock price are pay for the trade structure).
For long holders who fear a sharp decline, similar to what the stock has done on 5 of its 7 quarterly reports as public company, they might consider collars where the holder would sell an upside call and use the proceeds to buy a put or a put spread. This structure offers upside participation, depending on how tight the put or the put spread is also offers some potential losses but protection at a certain point. A holder would do this if they don’t want to sell but are willing to give up some potential upside for some protection. The Dec 38/25 risk reversal is trading at a slight credit (buy the Dec 25 puts, sell the Dec 38 calls) and fits this bill although the protection doesn’t kick in until near the recent lows. But that works if as disaster protection while still allowing for upside.
Those considering outright long exposure, but with defined risk, the Dec 30/40 call spread costs around $3. That will behave like stock between $33 and $40 but limiting your risk to 10% of the stock price.