(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Twitter Inc. (TWTR) shares have soared by almost 53% so far in 2018, and options traders are betting shares of the social media stock aren't done rising. In fact, traders are betting the stock may be about to surge by over 14%, climbing to nearly $42 by the start of next year. (For more, see also: Prominent Short-Seller Bullish on Twitter.) (Editor's note: following the original publication of this article on June 4, S&P Dow Jones Indices announced Twitter would replace Monsanto in the S&P 500, effective the market open on June 7.)
It isn't only the traders that are optimistic as analysts have been upping their outlooks for the company, and have also been growing more bullish on the stock. Even with the strong run in 2018, shares of Twitter are still almost 50% off their all-time highs of around $70 following its initial public offering. The stock's strong performance in 2018 comes as the company has delivered better than expected results on strong growth.
A 14% Jump
Options traders see shares of Twitter rising by about 14% to roughly $42 by expiration on January 18, 2019. The $37 strike price calls have an open interest that heavily outweighs that of the puts by nearly 15 to 1, with 85,000 open call contracts to roughly 5,700 open puts contracts. With the call options trading at a price of about $4.90, a buyer of the calls would need the price of Twitter's stock to rise to about $42 by expiration just for the options to break even. The dollar value of the open interest for the calls is a massive $41.6 million bet, a considerable sum given the length of time until expiration and the erosion of the options time value. (For more, see also: Who Is Driving Twitter's Management Team?)
Big Price Swings
The long straddle options strategy suggest that shares of the stock could rise or fall by about 25.7% from the $37 strike price. It places shares of the stock in a trading range between $27.5 to $46.5 by expiration, a wide range. The options are also pricing a massive amount of volatility as well.
Analysts Turn More Optimistic
Analysts have been steadily upping their outlook for the stock since the start of the year. Analysts have boosted their earnings outlook for the stock by nearly 63%, to $0.73 per share. Meanwhile, revenue forecasts have also climbed by about 14%, to $2.91 billion. Additionally, the number of analysts rating shares of the stock a "buy" or "outperform" has climbed to 27% from 16% on January 8, while the price target has increased by 56% to $31.10 up from $19.90. But what is surprising is that the ordinarily optimistic analysts have a price target on the stock that is 15% below the stock's current price of $36.65.
Twitter's strong results have surely helped change the sentiment investors and analysts have towards the stock. But the company will now have to deliver strong results, or the stock could find itself back where it started in 2018, giving up its big gains.
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.