(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Twitter's stock has risen 20% since the beginning of October after the company delivered better than expected third quarter results. The sharp gain is a stark contrast to the broader stock market's sell-off. Now, options traders are betting the stock will rise another 12% by the middle of January. Technical analysis also suggests the shares may advance short term.
A key driver is that analysts are boosting earnings and revenue estimates.
The options for expiration on January 18 show that bullish call bets at the $34 strike price heavily outweigh the number of bearish puts by a ratio of 6 to 1, with 8,000 open calls. Additionally, the call options at the $36 strike price have seen an increase in the number of open contracts by nearly 10-fold to 45,000 contracts since October 31. The $36 calls suggest the stock may rise 11% from its current price around $34.25 to $38.15.
The technical chart also suggests the stock may continue to climb to its next level of technical resistance at $36.50, a rise of 7%. The relative strength index has also been steadily rising and suggests that bullish momentum continues to move into the stock.
The company reported earnings of $0.21 per share versus estimates of $0.14 per share, while revenue was 8% better than expected. The stronger than expected results have led analysts to up their fourth-quarter earnings estimates by 11% and revenue by 4%.
Full-year estimates also have risen sharply, but the estimated growth rates for 2019 have fallen materially.
Twitter's rebound provides a dose of good news in a tech sector that's suffered major damage in recent weeks. But Twitter still remains more than 25% off its record high this year, a reminder that the company often has disappointed investors as much as it's pleased them. For the shares to continue to increase further, the company may to need to show investors that it can deliver strong earnings growth in 2019 and beyond.
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.