To paraphrase Mark Twain, the reports of Twitter Inc’s (NYSE:TWTR) death are greatly exaggerated. Driven by a new focus on live streaming TV — and an overzealous tweeter-in-chief in the White House — Twitter is clawing its way back to relevancy. What’s more, the company is slated to slip into the earnings confessional bright and early Thursday morning, where it hopes to prove that TWTR stock is far from joining the choir invisible.
With the likes of Facebook Inc (NASDAQ:FB), Pinterest and Amazon.com, Inc. (NASDAQ:AMZN) (via Spark) crowding its halls, the social media market is bulging with interesting contenders. In the past year, however, Twitter has gone from hemorrhaging users and, more importantly, ad dollars, to a new force in online live TV streaming.
While initial reports have been promising, revenue generated from Twitter’s new live streaming venture will be front and center in tomorrow’s quarterly report.
For the record, Wall Street is expecting a profit of 5 cents per share on revenue of $536.62 million — both down sharply from last year’s results. However, EarningsWhispers.com reports that some analysts may be considerably more bullish, with the whisper number coming in at 9 cents per share — a full 4 cents better than the Street’s view.
But, that’s where the optimism ends, apparently.
Sentiment and Options
According to Thomson/First Call, only five of the 36 analysts following TWTR stock rate the shares a “buy” or better. What’s more, the 12-month price target rests at $15.44 — well below Twitter’s current perch just shy of $20.
Meanwhile, short interest rose by 6% during the most recent reporting period, and now numbers about 55.7 million shares. At nearly four days to cover at Twitter’s current average daily trading volume, this wealth of short interest represents fuel for a potentially significant short-covering rally.
Click to Enlarge Turning toward TWTR options activity, we find continued negativity and a lack of concern from short sellers.
Currently, the July/August put/call open interest ratio for TWTR stock comes in at 0.88, with calls in near parity with puts among near-term options. However, this ratio jumps to 1.02 when we look at just the July 28 series of options (i.e. those that are most affected by Twitter’s earnings).
There are two takeaways here.
First, options traders are not expecting a rally in TWTR stock. Second, neither are short sellers, as evidenced by the lack of call options that are typically used to hedge short positions.
If there’s going to be a surprise rally that could shake up TWTR bears, this earnings report could deliver in spades. Currently, July 28 implieds are pricing in a potential post-earnings move of about 10.5% for TWTR stock. This places the upper bound at $22.08, while the lower bound resides at $17.92.
2 Trades for TWTR Stock
Call Spread: A rally in Twitter shares is not quite the long-shot it once was, and we have perfect contrarian set up heading into tomorrow’s earnings: a stock rallying amid a wealth of negativity. All we need is the spark. Traders looking to take a chance on a better-than-expected report from Twitter might want to consider an Aug $21/$22 bull call spread, which lies well within the stock’s expected move.
At last check, this spread was offered at 31 cents, or $31 per pair of contracts. Breakeven lies at $21.31, while a maximum profit of 69 cents, or $69 per pair of contracts, is possible if TWTR stock closes at or above $22 when August options expire.
Put Sell: For those not wanting to place an outright bullish bet, a July 28 series $17 put sell may be just the option you’re looking for.
At last check, this put was bid at 14 cents, or $14 per contract. As long as Twitter trades above $17 through July option expiration at the end of this week, traders who open this position will keep the initial premium received. However, if TWTR stock trades below $17 before Friday’s close, you may be assigned 100 shares for each contract sold at a cost of $17 each.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.