$TWTR Q4 Earnings Preview & Options Overlays

by Dan February 10, 2016 11:08 am • Commentary• Trade Ideas

Event: Twitter will report their Q4 results tonight after the close.  The options market is implying a whopping 17% one day move, which is rich to the average of about 14% one day move following the 8 quarters the company has been public. In 6 of the 8 quarters the stock has declined on average about 12.3% and on the 2 instances the stock has risen the average move has been about 18%.

With the stock at $14.85, the Feb 12th weekly 15 straddle (the 15 call premium + the 15 put premium) is offered at $2.70. If you bought that, and thus the implied move, you would need a move to $17.70 or to $12.30 just to break-even.

Price Action / Technicals:  The stock has been an unmitigated disaster, down about 80% from its late 2014 post ipo highs, and down an eye-popping 35% in 2016. Yesterday it traded at new all time lows.

For those trying to find anything constructive in the chart, there is little aside from the fact that you know you are stopped at zero.  There is no technical support in a stock like this at its lows, aside from the fact that 35% of their market cap is in cash (20% net of debt).  So there is decent valuation support between $5.25 and $3.

On the upside, the stock may hit some technical resistance at $21, which was the August 24th low, and the breakdown level in December, with fairly massive resistance up 100% from current levels at $30. The only way it gets there anytime soon is a knockout take-over bid (which is seems increasingly unlikely):

TWTR chart since 2014 IPO from Bloomberg
TWTR chart since 2014 IPO from Bloomberg

Sentiment:  Wall Street analysts are fairly mixed on the stock with 16 Buy Ratings, 23 Holds and only 3 Sells, with an average 12 month price target of $28.  Short interest sits at 9% of the shares outstanding.

Options Open Interest: overwhelmingly leads to calls vs puts, with 991,000 calls and 545,000 puts. The top 10 largest strikes of open interest are all calls.  The lower the stock has gone, the more put open interest has dropped off, with much of it expiring or being exercised in Jan expiration.

Fundamentals:  To be clear, they are in flux. Last year’s management turnover was also met with some fairly large strategy changes, which has in turn do little to increase user engagement, and certainly has not grown active users.  Bulls on the stock will speak to very healthy revenue growth, about 58% year over year in 2015, with an expected $3 billion in sales in 2016, growing 40% year over year. Monetization, user growth, all things that Facebook is growing flawlessly, has been elusive for TWTR and one of the main reasons the stock has not seen an uptick since last spring.

Expectations: RBC’s Internet Analyst Mark Mahaney who rates the stock a Buy with a $34 price target highlighted the following items to focus on in a note to investors last week:

1) User growth – We anticipate 11% Y/Y growth in Q4, resulting in Twitter’s global user base growing to 323MM MAUs, or 3MM Q/Q Net Adds vs. 5MM in Q4:14. We expect U.S. MAUs to be flat Q/Q at 66MM.

2) Revenue growth trends…especially advertising – Advertising revenue makes up ~90% of Twitter’s total rev, composed of Own Site and Off Network segments. We expect to see continued deceleration over time and in Q4 we est 51% Y/Y growth to $652MM on a 12pt easier comp.

3) Monetization gap – We expect TWTR to generate $2.02 for every MAU in Q4 vs. FB’s $3.59 (were $1.60 & $2.83 in Q3).

My View:  Regular readers know that I was right on TWTR for the latter part of 2014 and the first part of 2015, but have been very wrong on TWTR on the long side since last Summer.  I have cut and pasted the following excerpt from my last couple posts on TWTR, and the enterprise value keeps going lower:

With an enterprise value of about $8.4 billion, it is my view, like it was last year with enterprise value of $20 billion, way too unique and scarce of a social media property to be trading at these levels.  I am not going to go into my fundamental views about m&a potential or what needs to be done to increase engagement, grow their stalled user base and convince advertisers to place ads, (here was my last post on the stock from Dec 29th & immediately below) and you can read some of the other posts here here here here here here (you get the point, I like TWTR).

Wrong is wrong. But to be fair, when I have wanted to trade the stock around potentially volatile earnings events, I have usually used options to define my risk. But with the last go around in mid January (when the stock was $18.80) I merely bought stock. This was with the full knowledge that further downside was possible (which it has had). But I am now in it to win it for the long haul and will continue to manage that position with option overlays.

So here is the thing, for readers looking for commentary that will help them arrive at whether or not a $15 entry is a great level, I’ll just tell you that I thought $18.80 was a great entry less than a month ago. While I think my analysis will ultimately prove to be right on the stock, it could take a while.  Overall I have not been good on the stock, plain and simple, as my vision for their future has not coincided with that of large shareholders.

So What’s the Trade??  

Defensive for existing longs: If you thought the company might kitchen sink 2016 guidance and allow themselves to consistently beat very low expectations, than you might consider a collar on your stock. That said, if it is fairly transparent, shorts might cover, and the stock rips through the short call. So this trade is only for those willing to be called away higher. Here is that example of a collar:

TWTR ($15) Buy March 20 / 12 Collar for 20 cents against 100 shares of stock
  • Sell to open 1 March 20 call at 65 cents
  • Buy to open 1 March 12 put for 85 cents

Break-even on March Expiration:

Profits: of stock between $15 and $20, stock called away at $20, (but could always cover one of the short calls prior to expiration to keep stock position in tact).

Losses: between $15 and $12 of stock, protection below

Rationale: This is disaster protection against a long. It works really well for those that have bought the stock here or even slightly higher and wouldn’t mind selling at $20. But the downside is defined and no losses occur on your shares below $12 (minus the .20 paid)


Leverage for existing longs: If you though the stock will rally no matter what the company does or says, as you think it is a coiled spring, then you might consider an out of the money one by two call spread against long stock to add leverage in the event of a sharp move higher. Here is an example of a 1×2 call spread to use as an overlay to long stock. This is a trade I am doing against my long shares:

*vs 100 shares of TWTR ($15) Buy 1 March 20/23 1×2 call spread for even money against 100 shares of stock
  • Buy to open 1 March 20 call for 66 cents
  • Sell to open 2 March 23 calls at 33 cents each, or 66 cents total

Break-even on March expiration:

Profits: of stock between $15 and $23, gains of up to $3 from the added call spread. The stock would be called away (but could always cover one of the short calls prior to expiration to keep stock position intact) at $23, but effectively would have sold it at $26

Losses: of stock below $15

Rationale: this trade offers no protection, so it isn’t for those that are worried about more downside. What it does is offer leverage in the case of a sharp move higher. In my case my last purchase of the stock was 18.80 so I am willing to leverage a move higher and be called away (or give up profits) above a leveraged effective price of $26.


New Bullish Trade: If you have not been involved, and you think enough is enough, and willing to take a shot that the stock could rally 20% in the coming weeks after the results, and are willing to be put the stock at lower levels if wrong, then you might want to consider a bullish risk reversal.

TWTR ($15) Buy March 12 / 19 Risk Reversal for even money (in lieu of 100 shares of stock)
  • Sell to open 1 March 12 put at 85 cents
  • Buy to open 1 March 19 call for 85 cents

Break-even on March Expiration:

Profits: above $19

Losses: below $12.

Neutral: no gains or losses between $12 and $19, but on a mark to market basis before March expiration the position will show losses as the stock moves lower close to the short put strike, or gains as the stock moves closer to the long call strike.

Rationale: This is an effective way to be involved in the stock for a sharp move higher while not risking anything in the stock unless it was below 12 on March expiration. This is for those willing to buy the stock (i.e. be put the stock with the short put) for $12.


4Q adj EPS est. 12c (range 6c-16c)
4Q rev. est. $709.9m (range $695m-$727m), co. forecast $695m-$710m (Oct. 27)
4Q Ebitda est. $175.9m (range $160m-$193m), co. forecast $155m-$175m (Oct. 27)
4Q monthly active users (MAU) est. 324m (avg of 4 ests. compiled by Bloomberg News, implying +1.3% q/q)
1Q rev. est. $629.0m
1Q Ebitda est. $152.9m
2016 rev. est. $3.09b
2016 Ebitda est. $805.4m