Call Traders Blast Twitter Stock as Earnings Loom

TWTR appears to be pricing-in results too far into the future

Oct 21, 2021 at 10:17 AM
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The last time we checked in with Twitter, Inc. (NYSE:TWTR), the social media stock was surging after a billion-dollar deal. Now, two weeks later, with a market cap of $52.5 billion, Twitter is preparing for its turn in the earnings confessional next Tuesday after the close. Ahead of the event, options traders are loading up on calls. 

On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders bought to open almost five calls for every put on the equity in the past two weeks. The resulting 10-day put/call volume ratio of 4.77 is in the 96th percentile of its annual range, indicating TWR traders are showing a much healthier-than-usual appetite for bullish bets of late.

Twitter stock, last seen down 0.5% to trade at $65.45 today, is up 20.5% in 2021. There's rom for upgrades that could fuel a run at the stock's Feb. 25 record high of $80.75. Of the 23 brokerages in coverage, 16 maintain "hold" or "strong sell" ratings on the equity.

Twitter stock has a mixed history of post-earnings reactions. There's a 15.2% bear gap in April, but also a 13.2% pop back in March. Overall, TWTR averages a post-earnings move of 12.5% in the last eight quarters, regardless of direction. For Wednesday's trading, the options market is pricing in a 12.9% move for the social media stock.

Twitter trades at an inflated price-earnings ratio of 140.00 and holds a high price-sales ratio of 12.11, making TWTR overvalued in most senses. However, although the value is still rich, Twitter stock's forward price-earnings ratio of 44.05 suggests the social media company will have considerable earnings growth in the coming year. The anticipated growth is likely a result of TWTR's ongoing recovery after experiencing a $2.6 billion decrease in net income in 2020.

Since reporting a net loss of roughly $1.1 billion in 2020, Twitter has managed to bring its trailing 12-month net income back up to $384 million. However, TWTR's net income is still down 74% in comparison to the $1.466 billion generated in 2019. This places a big margin of expected growth on the company.

If options traders are so inclined, TWTR's Schaeffer's Volatility Scorecard (SVS) comes in at a relatively high 94 (out of 100). In other words, the security has exceeded options traders' volatility expectations in the last year.

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