(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Twitter Inc. (TWTR) stock has soared more than 74% in 2018, crushing the S&P 500 return of about 5%. Second-quarter earnings results are expected to come July 27 before the start of trading. Options traders are looking for a huge price swing of nearly 14% for Twitter following the results.
Analysts are looking for the company to say that second-quarter earnings increased by over 36% to $0.16 per share, while revenue is expected to rise by nearly 22% to $697 million. Analyst estimates have remained unchanged over the past month.
The long straddle options strategy set to expire on August 17 implies shares of Twitter may rise or fall by about 14% from the $42 strike price. It places the stock in a trading range of approximately $36 to $48 by expiration. The number of bets that shares of Twitter's stock will fall outweigh the number of wagers the stock will rise by nearly 3 to 1, with 5,200 open put contracts.
A buyer of just the puts at the $42 strike price would need the stock to fall to roughly $39, a drop of over 7%, from the current stock price of approximately 42.20. This is because the put options cost $3 to buy. Should the stock fall to $39, shares would be nearly 18.5% off their June 15 intraday high of approximately $47.80.
Implied volatility for Twitter is also very high for August expiration as well, at nearly 68%. It is more than seven times greater than the S&P 500 implied volatility of 9.4%. It is also higher than another stock which is expected to see significant price swings after it reports results, Advanced Micro Devices Inc. (AMD), at 66%. (For more, see also: AMD May See Massive Volatility After Earnings.)
Less Than Enthusiastic
Despite the enthusiasm among investors which have sent shares soaring, analysts have been less bullish on the stock. According to data from YCharts, the average analyst's price target on the stock is $34.60, 17% below the current stock price. Meanwhile, only 24% of the 38 analysts covering the stock have a buy or outperform rating on the shares. Meanwhile, 55% rate shares a hold, while 21% rate shares a sell. (For more, see also: Prominent Short-Seller Bullish on Twitter.)
A Bumpy Ride
Twitter's stock has had a bumpy ride over the past year, with the stock plunging by roughly 20% or more from its highs on two occasions, once in August and again at the start of April. Shares are now 10% off its most recent top seen in June.
It would seem the options market is pricing in elevated levels of volatility for Twitter and with reason. Quarterly results will be crucial in determining if the volatility helps shares rise or fall.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.