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The Contrarian Case for a Twitter Inc (TWTR) Stock Earnings Rally

Twitter stock is oversold, trading near all-time lows and near-universally hated

Once touted as the social media choice of the next generation, Twitter Inc (NYSE:TWTR) has fallen hard, and fallen fast. The next generation has moved on from microblogging and into social media platforms like Snap Inc’s (NYSE:SNAP) SnapChat and Facebook Inc’s (NASDAQ:FB) Instagram. What’s more, the older generations are still firmly tied to their Facebook pages.

Twitter Stock: The Contrarian Case for a Twitter Inc (TWTR) Earnings Rally
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In fact, as Josh Enomoto puts it, “Twitter does not offer a useful platform unless you’re a celebrity, journalist or social media guru.” Twitter has essentially become a glorified RSS feed, one that has seen its ad revenue flowing out to more profitable social media locations. As such, there is currently no compelling reason to own TWTR.

However, for short-term investors and speculative options traders like myself, Twitter stock offers a potentially lucrative opportunity.

TWTR will step onto the earnings stage on Wednesday next week. The consensus is calling for a year-over-year plunge in earnings from 15 cents per share to a penny. What’s more, revenue is seen dropping 13.9% to $511.91 million. For regular Twitter followers, these eroding fundamentals are no surprise.

TWTR Stock’s Earnings Outlook

What would be a surprise to nearly everyone on Wall Street would be an earnings beat. And it’s not such a far-fetched possibility. In fact, reports that Twitter’s whisper number comes in at 5 cents per share, well above the current consensus. If the company can come anywhere near this figure, and not offer up abysmal guidance, Twitter stock should rally.

As I alluded to above, don’t expect this quarterly report to offer any long-term buying opportunities. The rally I’m looking for is a short-term, knee-jerk reaction for a stock beaten down and mired in bearish sentiment. TWTR is oversold and trading near all-time lows, increasing the likelihood of short-term buying power on any positive news.

Furthermore, expectations are near rock bottom for Twitter stock as well. For instance, Thomson/First Call reports that only four of the 38 analysts following TWTR rate the shares a “buy,” with 13 outright “sell” ratings. Additionally, Twitter stock is trading north of the consensus 12-month price target of $14.05.

In other words, there is plenty of coverage and more than a little wiggle room for target increases or ratings shifts, and Twitter only has to convince one or two analysts to upgrade with next week’s quarterly report.

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A short-squeeze situation is also a possibility, if a remote one. Following a 7% jump in short interest during the most recent reporting period, more than 70 million shares of Twitter stock are now sold short — representing a sizeable 11.4% of the stock’s float. I wouldn’t expect long-term TWTR bears to cover on a post-earnings rally, but the weaker hands could be forced into buying back their bets and adding to a short-term spike.

Twitter stock
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Finally, options traders appear to be preparing for a short-term jump in Twitter stock. The 28 April put/call open interest ratio currently rests at 0.37, with calls nearly tripling puts among those options most affected by TWTR’s earnings report. This ratio rises sharply to 0.77 for the May series, reinforcing the idea of a short-term, earnings induced rally.

Overall, 28 April implieds are pricing in a potential post-earnings move of about 9.5% for Twitter stock. This places the upper bound at about $15.87, while the lower bound lies at $13.13. Should Twitter surprise with next week’s report, the shares could easily challenge resistance at $16 after overcoming their 50-day moving average near $15.50. Meanwhile, the $14 region remains a firm floor for TWTR stock, barring anything short of a complete debacle.

2 Trades for Twitter Stock

Call Spread: For those looking to take a risk and bet on a contrarian post-earnings rally for Twitter stock, a May $15/$16 bull call spread has plenty of potential. I’m looking at May so as to provide more room for the rally to play out, and because 28 April implieds will eat into returns.

At last check, the May $15/$16 bull call spread was offered at 27 cents, $27 per pair of contracts. Breakeven lies at $15.27, while a maximum profit of 73 cents, or $73 per pair of contracts, is possible if Twitter stock closes at or above $16 when May options expire.

Put Spread: For those looking for a more conservative play (relatively speaking), then a 28 April $13 put should remain out of the money through expiration. At last check, this put was bid at 19 cents, or $19 per contract.

As long as TWTR trades above $13 through the close of trading next Friday, traders who open this position will keep the initial premium received. However, if Twitter stock trades below $13 before expiration, you may be assigned 100 shares for each contract sold at a cost of $13 each.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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