Twitter's (TWTR) stock may be heading to as high as $42 in the coming weeks based on a technical and options market analysis. That would be an increase of about 9% from the current price on May 16 of around $38.70.
The stock has been performing well since reporting better than expected first quarter results. The company more than doubled analysts earnings estimates, while revenue came in 1.5% ahead of those estimates.
The last time I wrote on Twitter was on Dec. 13, and that turned out to be a bad call on my part, thinking the stock would rise. Instead, it plunged during the fourth quarter stock market sell-off. You can now track my success and failure rate from these articles on this Google Spreadsheet I created.
The options for expiration on June 21 suggest the stock rises or falls 9% from the $39 strike price, using the long straddle. It places the stock in a trading range of $35.50 to $42.45 by that date.
What may be more interesting is that open interest levels at the $41 strike price calls increased on May 16 by almost 10,000 contracts to a total of approximately 13,000. For a buyer of those calls to earn a profit, the stock would need to rise to around $41.80 by the expiration date.
Chart Turns Bullish
The technical chart for Twitter also is bullish and shows that the shares have successfully tested and held technical support at $36.50. Now the stock is breaking out rising above a short-term downtrend. It may help to lead the shares higher towards its next significant level of resistance at around $41.90. Additionally, the relative strength index has been trending higher for some time, also suggesting that stock continues to rise, as bullish momentum enters the equity.
Analysts Turning More Positive
The company's healthy first quarter results and guidance has resulted in analysts increasing their expectations for the company. Following the results, analysts have boosted earnings expectations for 2019 by 12.6%, while upping 2020 estimates by 8% and 2021 by 7%.
Analysts estimates now suggest that Twitter will grow its earnings at a compounded annual growth rate of 15.1% through the year 2021 while growing revenue at a compounded annual growth rate of 14.6%.
Valuation Seems Mixed
It leaves the stock trading at roughly 35 times 2020 earnings estimates of $1.10 per share. Which doesn't come cheap when adjusting for growth, at over two times the company's projected three-year growth rate, however, should the company continue to deliver better than expected results in the future, and estimates continue to rise, the valuation may fall. However, the stock is currently trading at the lower end of its historical valuation range of 21 to 56, make shares seem reasonable value on a historical basis.
Over the short term, it appears the market believe that Twitter will continue to perform well, regardless of its valuation. At least, that's what the chart and the options suggests.
The focus of Reading the Markets is to find stocks that may rise or fall using fundamental, technical, and options market analysis. Additionally, we search for clues from the broader markets to discover trends and gauge direction.
Michael Kramer relies on his more than 20-year of experience working in the financial industry. 10-years of experience comes as an international and domestic buy-side equity trader at multi-billion long/short investment advisor.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results. m