Wednesday, September 3, 2014

* GOGO - Is the Stock Price Really 'Low Risk?' Four Charts That Point to a Risk Mispricing

Share on StockTwits

GOGO is trading $16.89, down 0.9% with IV30™ down 0.5%. The Symbol Summary is included below.

Provided by Livevol

Update: 9-11-2014

Provided by Livevol

GOGO is moving....

NEW YORK (TheStreet) -- Gogo (GOGO_) was gaining 7.2% to $18.20 Thursday after announcing a new partnership with T-Mobile (TMUS_) .

The new partnership will give T-Mobile the ability to send text messages and receive visual voice mail while flying in a Gogo-equipped airplane. The feature is available to all T-Mobile customers with a Wi-Fi enabled smartphone, and is included in every Simple Choice smartphone plan.
Source:, written by Shawn Ingram.

Early after IPO, GOGO didn't find an equilibrium, trading as low as $10 and as high as ~$34.  But, since Jun, the stock has found a fairly calm equity price, bouncing minimally relative to the past.  That stock price calm has brought the forward looking risk in the stock price as reflected by the option market down to near all-time lows.

I will show you the option market risk pricing along side some fundamental measures of the company's growth, and then pose a simple question: Is the risk in GOGO in the option market too low?

Let's start with the stock chart (all-time), below.
Provided by Yahoo! Finance

We can see the bumps in the early days, the radical rise and then drop in equity price, and finally the sort of "calm period" that has existed for a few months.

Let's turn to the option market risk pricing.  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.  We can see that the forward looking risk is near all-time lows and has been dropping with the quiet period in the stock price.  Those crazy rises and falls surrounding earnings (the blue "E" icons represent earnings) are normal.  It's the trend that we want to examine.

Now that risk is priced so low, let's turn to the fundamentals of the firm and see if that risk is also low i.e. have calmer trends formed in the company's financial results.

This is an easy one: GOGO revenue is exploding.  This is a "must have" for a firm with negative earnings (losses) yet a market cap of ~$1.5B.

Gross Margin %
One of the most attractive parts of many of the MOMOs is their incredibly high gross margin %.  GOGO shows some nice numbers, but I do note a little slippage. In any case, 50% gross margins is strong (not YELP or FB strong, but still strong).

Net Income (Earnings)
This is where the 'all-time low risk' doesn't jive for me.  GOGO revenue is booming, gross margins are pretty consistent, but earnings are down.  Losses aren't necessarily a bad thing, certainly as a young company grows it's common to see losses, but there is always a question of: "is this thing gonna work?"

Research & Development 
The firm continues to invest in research & development in proportion to operating expense and that investment (expense) does have a dramatic impact on net income, and that's likely a 'good thing.'

Now that we've seen the risk pricing and some fundamental measures, let's see the explicit risk pricing in the option market. The Options Tab is included below.

Provided by Livevol

Using the at-the-money (ATM) straddle we can see that the option market reflects a price range of [$15.40, $18.60] by the end of trading on Sep. 19th, or [$14.50, $19.50] by the end of trading on Oct. 17th.

  • 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.

Legal Stuff:
Options involve risk. Prior to buying or selling an option, an investor must receive a copy of Characteristics and Risks of Standardized Options. Investors need a broker to trade options, and must meet suitability requirements.

The information contained on this site is provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation. Consult the appropriate professional advisor for more complete and current information. I am not engaged in rendering any legal or professional services by placing these general informational materials on this website.

I specifically disclaim any liability, whether based in contract, tort, strict liability or otherwise, for any direct, indirect, incidental, consequential, or special damages arising out of or in any way connected with access to or use of the site, even if I have been advised of the possibility of such damages, including liability in connection with mistakes or omissions in, or delays in transmission of, information to or from the user, interruptions in telecommunications connections to the site or viruses.

I make no representations or warranties about the accuracy or completeness of the information contained on this website. Any links provided to other server sites are offered as a matter of convenience and in no way are meant to imply that I endorse, sponsor, promote or am affiliated with the owners of or participants in those sites, or endorse any information contained on those sites, unless expressly stated.

No comments:

Post a Comment