TWTR: How to Trade Twitter Stock After Earnings

Social media giant Twitter Inc (NYSE:TWTR) is scheduled to report its next batch of earnings after the close of trading today. Much is riding on the earnings report — and more importantly, on the growth outlook and plans after Twitter sorely disappointed investors at its last report in late April.

beatthebell_185x185Twitter stock has since been largely stuck in its tightest trading range ever, which at the margin increases the chances of an outsized move in either direction after today’s earnings report.

Analysts are looking for Twitter’s second-quarter earnings to come in at 4 cents per share on revenues of around $480 million. That would be a doubling of profits year-over-year, and a 55% ramp up in revenues should the number come in line with estimates.

Analysts also are looking for TWTR to report an increase of about 5 million users in the latest quarter, which equates about 13% growth rate on a year-over-year comparison. Twitter should now have well more than 300 million active users.

While user growth rates will be closely watched, lots of investors (yours truly included) still are looking at Twitter stock as a potential acquisition target, or at least think the company will strike a major strategic alliance with someone. One of the risks of putting a wrench into these “hopes” would be the appointment of a new CEO. This would signal that the return of Jack Dorsey as interim chief was truly just to find a new CEO rather than to transition to company toward a sale.

Another focus for investors will be a progress report by TWTR on making the social platform more user-friendly. Many new users have expressed frustration with the complexity of the platform, and from personal experience, I can see where they’re coming from.

Twitter Stock Charts

Looking at the chart of Twitter stock since its initial public offering in November 2013 shows a stock that since October 2014 just hasn’t been able to get out of its own way.

Twitter chart since IPO
Click to Enlarge

In April, after Twitter reported less-than-admirable user growth and missed revenue expectations in the first quarter, TWTR shares fell hard and have been stuck in a tight range ever since. This range has also caused the Bollinger Bands to come closely together, which also increasingly threatens a larger directional move.

The options market is expecting the stock to make about a 4.5-point move in either direction after earnings, which would represent a 12% to 13% move. This would clearly push the stock well out of the tight trading range that has taken hold of Twitter stock since late April. Options implied volatility is currently in the 83rd percentile of it’s 542-week range (or, in other words, it’s notably high).

Twitter daily stock chart
Click to Enlarge

I thus see two potential trades setting up once Twitter has reported earnings:

  1. Upon a gap down and selloff, active investors could either look to sell out-of-the-money put spreads or leg into an initial long position with the stock directly around the $30 area. The goal would be to ride a snap-back rally/oversold bounce back into the mid-$30s rather quickly.
  2. Alternatively, a gap up and rally after earnings could allow active types to buy TWTR stock for a move into the mid-$40s over the next few weeks, as long as the gap up is not reversed on the same trading day.

Like what you see? Sign up for our daily Beat the Bell e-letter and get investment advice delivered to your inbox every morning!

Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.

More From InvestorPlace

Article printed from InvestorPlace Media,

©2021 InvestorPlace Media, LLC