Earnings Wednesday: Twitter's User Growth May Matter More Than Revenue

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Includes: TSLA, TWTR
by: JJ Kinahan

Summary

TWTR results are expected to be steady to higher than the year-earlier comparable.

If implied volatility is any indication, TWTR's quarterly results could spur needle-moving stock activity.

Analysts reporting to Thomson Reuters are forecasting a per-share profit of $0.10 for TSLA, which would shatter four straight quarters of losses.

Twitter's (NYSE:TWTR) handling of management and its growing pains are well-documented news that has crushed its stock in recent months. So much buzz may put added pressure on the social media company to calm the waters when it reports earnings after the closing bell on Wednesday.

Traders will likely want to hear what Chief Executive Jack Dorsey has to say about the revolving door at Twitter after five higher-level executives left last month. Wall Street is also tuned in for any potential changes to how the Twitter feed is fed and managed, what new products may be in store, and how much, if at all, the user base is expanding.

As for the results themselves, they're expected to be steady to higher than the year-earlier comparable. The Thomson Reuters survey of analysts is projecting, on average, earnings per share of $0.12, matching last year's quarter. Notably, analysts expect a top line of $710 million, a 48% jump over the year-ago revenues and based largely on expected strength in mobile ad growth after that metric helped Facebook (NASDAQ:FB) and Google parent Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL). Revenue may not matter as much as you might think right now. Wall Street is obsessed with user growth and will likely care more about what's next not how last year wrapped up.

Active Stock

If implied volatility-sitting at the 100th percentile-is any indication, the quarterly results could spur needle-moving stock activity. Short-term option traders have priced in a potential 19% share price change in either direction around the earnings release, according to the TD Ameritrade thinkorswim® platform's Market Maker Move indicator.

Such a response may not surprise investors who've followed the stock; it's erased nearly 70% of its value in the last year and 27% in the last month alone (figure 1). The S&P 500 (NYSEARCA:SPY), meanwhile, is down 4% on the month, by comparison.

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Figure 1: Traders All Aflutter? Twitter shares on Tuesday swung as much as 7% in both directions before ending the session relatively flat. They've hit the lowest this week since their IPO.. Volatility has picked up heading into Wednesday's post-close earnings release. Chart source: TD Ameritrade's thinkorswim® platform. Data source: Standard & Poor's. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

That's a lot of wing-flapping for a stock that some on Wall Street say might fall under the love-the-product-not-the-underlying-stock category. Time will tell. For now, notable options activity shows buying around the weekly Feb 15 call options and the weekly 14 put options.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price and over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

Tesla: A Swing to Black?

Tesla's (NASDAQ:TSLA) is another management team that likely needs to quell negative chatter when it releases earnings after the closing bell Wednesday.

Most traders likely want to hear how well production is going for its luxury electric cars-in development and at the drawing board-as well the progress on its Gigafactory battery plant in Las Vegas. Industry analysts are looking for an update on Model X deliveries and any guidance on a cheaper Model 3 that some expect to be unveiled next month.

Analysts reporting to Thomson Reuters are forecasting a per-share profit of $0.10, which would shatter four straight quarters of losses. A year ago, TSLA reported a $0.08 loss. Revenue is expected to surge some 64% to $1.8 billion.

Implied volatility on TSLA is also high ranking at the 100th percentile. Short-term option traders have priced in a potential 14% share change in either direction around the earnings release, according to the TD Ameritrade thinkorswim® platform's Market Maker Move indicator.

Options activity has picked up, too, with notable volume in the weekly Feb 140 put options and for the weekly 175 and 180 calls.

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Figure 2: U-Turn in Sight? Tesla stock closed 2015 at $240 a share and is now trading in the $148 range, a 38% drop. Chart source: TD Ameritrade's thinkorswim® platform. Data source: Standard & Poor's. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. Commentary provided for educational purposes only. Past performance is no guarantee of future results or investment success.

Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before investing.

Disclosure: I am/we are long TWTR.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.