(Note: The author of this fundamental analysis is a financial writer and portfolio manager.
Twitter Inc.'s (TWTR) stock has fallen 38% since July, one of the worst declines of a high-profile tech stock this year. Now, Twitter's fortunes could change in the next few weeks. Some options traders are betting the stock will rise 18% by the middle of November after it reports earnings on Thursday.
Technical analysis suggests that Twitter's stock may rise over the short term as well. The bullish sentiment comes ahead of what analysts expect to be strong earnings and revenue growth for the third quarter. That strength is clouded by the fact that analysts have been reducing their quarterly and full-year estimates.
The options for expiration on November 16 have seen an increasing level of open interest at the $33 calls. Since October 18, the number of open call contracts at that strike price has increased by nearly eight times to 23,000 open contracts. A buyer of those calls would need the stock to rise to roughly $34.20 to earn a profit from the current stock price of $29.00.
Some traders are even more bullish, based on the rising number of open calls at the $34 strike. It suggests the stock will climb 21% to $35.
Directionally, the technical chart agrees with option traders' bullishness. The stock has found technical support around $27 a share. Should the stock rise above technical resistance at $30.20, it may advance 10% to $32.00. Additionally, the relative strength index (RSI) has started trending higher since reaching an oversold level below 30 in September. It suggests that bullish momentum is beginning to move into the stock.
That bullishness may be driven by analysts who estimate the company will deliver third-quarter earnings growth of 38% and revenue growth of 19%.
Twitter has been famous for disappointing investors in the past. And a big warning sign may be that analysts have lowered their forecast for the balance of the year and also for 2019. Analysts see 2019 earnings growing 11%, down from prior estimates of 13%, even as revenue estimates remain unchanged. Clearly, traders and technical analysis indicate that investors are betting all of the bad news is reflected in the current stock price. If they're wrong, Twitter's shares could sell off instead or rebounding.
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.