2 Software Stocks Rallying Into Earnings

Both WDAY and VMW are trading at all-time highs before earnings

by Josh Selway

Published on Feb 27, 2019 at 2:20 PM

Software names Workday Inc (NASDAQ: WDAY) and VMware, Inc. (NYSE:VMW) are set to report earnings after the close tomorrow, Feb. 28, and both stocks have been strong heading into the quarterly updates. Below, we'll take a closer look at WDAY and VMW shares to see how Wall Street is positioned before earnings.

Room For Bull Notes on Workday

WDAY stock was last seen trading at $197.02, holding near Monday's record high of $198.97. The equity has gained 53% year-over-year, including a late-January bull gap sparked by speculation the company won a contract to work with Accenture (ACN).

Also helping along the way was a huge earnings reaction back in November that sent the shares 10.1% higher the day after the report, a move that was well above the stock's average post-earnings swing of 5.4% during the past two years. Speculators are expecting more increased volatility going forward, pricing in a 9.1% move for Friday's trading.

Analysts, meanwhile, have been weighing in bullishly this week, illustrated by price-target hikes to $218 from $216 from RBC and Oppenheimer, respectively. Seventeen of the 32 brokerage firms covering Workday stock have "buy" or "strong buy" ratings, though the average 12-month price target comes in at $174.61 -- suggesting there's potential for more price-target hikes should earnings impress.

VMW Eyes Ridiculous Win Streak

Turning to VMW stock, it just hit a record high of $176.66, bringing its one-year advance north of 64%. Incredibly, the shares are on pace for a 13th straight daily gain, benefiting from recent media reports about a potential cloud partnership with Microsoft (MSFT).

Volatility expectations are unusually high around the stock ahead of earnings, even based on past earnings moves. For instance, VMware has posted an average post-earnings swing of just 3.6% during the past eight quarters, but this time around the options market is pricing in a 7.7% move for Friday. Last quarter the security rose 3.6% the day after earnings.

What's more, options traders have been showing bearish tendencies in recent weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), where the 10-day put/call volume ratio comes in at 1.36. This reading ranks in the 87th annual percentile, revealing that such strong demand for long puts is quite rare. However, the largest increases in open interest during this two-week time frame occurred at the longer-term July 160 and 170 puts.

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