Monday, July 28, 2014

* Twitter (TWTR) - Earnings Preview: Lowest Risk into Earnings Ever; But There's More to This

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TWTR is trading $37.89, down 0.7% with IV30™ up 3.5%. The Symbol Summary is included below.

Provided by Livevol

UPDATE: 7-30-2014

Provided by Livevol

The option market drastically under-priced risk, with TWTR hitting an intraday high of $48.00.


This is an earnings preview note surrounding the stock and the implied volatility of TWTR.  Just to be very clear, I love the product.  It is by far my favorite social media company.  In my private time I'm even a little elitist about it -- "the smart people" social media (yes, I simply ignore the other reality surrounding celebrities, etc.).

In terms of actual real world, I think it's a winning argument to say that TWTR is the most disruptive and impacting (Arab Spring, and anything else that matters -- but not the Oscars!) of the bunch.

In what might have been my best call in 2013 on this blog, I wrote about TWTR's risk (implied volatility) on 12-10-1013 and the follow up to that (12-26-2013) is included below.

Dec. 26, 2013
Twitter (TWTR) - UPDATE: How the Option Market Totally Blew It, And We Knew it Two-Weeks Ago

The risk in the stock price off of earnings reflected by the option market is "middle-of-the-road" for TWTR, but when focusing on earnings risk -- it's the lowest it has ever been (ever = two prior earnings releases).

The option market reflects a price range of [$33.60, $42.40] out of earnings.

The all-time stock chart is included below.

Provided by Charles Schwab optionsXpress

This is an interesting stat: TWTR stock is down 15.82% since going IPO (since it's first closing price of $43.98).

We can see:
  • The stock hit an all-time high of $74.73.
  • The stock dropped from that high to an all-time low of $29.51.
  • The stock has recovered back up to ~$38.

While that sounds crazy volatile, a lot of that was the initial phase of the company going public.  For a while now, the stock has been kinda comfortably at this level.  In fact, the HV30 (the realized volatility over the last 30-trading days is just 36% (annualized).

Stretch that period out to 60-trading days and the realized volatility is 58%.  So it's the divergence between this recent quiet period, and that "not quiet" period before that we must grapple with.

The question is, when earnings come out, what happens?  Not 'up' or 'down,' but rather, 'big move' or 'small move?' The thing is, I just don't think the world is able to value TWTR yet -- remember that a stock price the present value of all future free cash flows.  What do those future free cash flows look like for TWTR? They could be enormous.  They could also be... not.

Let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days).

In English, the red curve is the risk in future stock price movement. The blue "E" icons represent the earnings dates.

Earnings #1: Stock went from $65.97 to $50.03.
Earnings #2: Stock went from $42.62 to $38.97.

Note that for both, the stock fell.  So, thus far, TWTR has been quite unimpressive in its earnings releases.

For the record, TWTR stock has never traded above the price it traded at before earnings. i.e. It has never gone back to $65.97, and it has never gone back to $42.62 (closing prices). So in effect, earnings dates have been points of peaks in the stock price in a rather tiny sample of two earnings releases.

Recently there have been reports of 'new metrics' to measure growth, traffic, potential profitability,whatever and oddly TWTR (the company) caught some loud criticism on TWTR (the product) for these new measures.

But this is where we are... for better or worse. Rather than get lambasted for my own opinions, I'll stay agnostic and just give you the facts.  You decide whether TWTR implied volatility is priced correctly.

Finally, the Options Tab is included below.

Provided by Livevol

Using the at-the-money (ATM) straddle in the Aug1 weekly options we can see that the option market reflects a price range of [$33.60, $42.40].

Using the Aug monthly options we can see that the option market reflects a price range of [$33, $43].
  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

This is trade analysis, not a recommendation.

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1 comment:

  1. Actually this is really fantastic news for Twitter (TWTR) - Earnings Preview: Lowest Risk into Earnings Ever but thank you for sharing it with us!