Why The Uber Pre-Earnings Trade Worked, And Lessons For The Next Round

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About: Uber Technologies, Inc. (UBER), Includes: LYFT
by: Duru
Summary

Options pricing provided a low-risk configuration, and heavy call trading flagged a bullish signal.

Lyft earlier absorbed a lot of sector-related negativity, and near oversold trading conditions in the stock market absorbed residual negativity.

Post-earnings trading coincided with analyst rating initiations.

Ever since I made the case for buying Uber (NYSE:UBER) shares, the trade dynamics have unfolded faster and more bullishly than I expected. The first trade worked out, and soon after that, I considered the case for going long Uber ahead of earnings. I chose a relative low-risk configuration going long a June 7 $42.00/$43.50 call spread; I thought of the all-time high of $43 at that time as representative of the upside opportunity rather than the more "obvious" $45 IPO price.

Uber (<span>UBER</span>) broke out this week to an all-time high but failed to hold its IPO price of $45. Uber broke out this week to an all-time high but failed to hold its IPO price of $45.

Source: FreeStockCharts

In the hopes of building upon this success, I reviewed the various factors that made the pre-earnings trade a winner. Some of these contributors could only be known in hindsight.

  1. High volume options trading was biased toward call options while the price action was languishing a bit off the $43 all-time high. I interpreted the contrary trading as indicative of a bullish bias.
  2. Options pricing was very attractive and provided a low-risk configuration for both generating immediate upside and the opportunity to wait out the post-earnings trading response for over a week.
  3. By getting to the public market first, Lyft (NASDAQ:LYFT) absorbed a lot of the immediate market negativity about the ride-sharing market and its valuation. The rapid bottoming in UBER was an early sign of this dynamic, and it gave a bullish forward bias to shares going into earnings.
  4. UBER's management clearly took lessons from how Lyft handled its earnings report and crafted its own earnings report with a healthy dose of optimism, forward-looking innovations, and pragmatism. From press release:
    • "Our Q1 2019 results were at or near the high end of the ranges we shared last month in our IPO prospectus" - Management is reliable.
    • "…we will not hesitate to invest to defend our market position globally." - Management is determined to win and has the resources to do so.
    • "We maintained stable regional ridesharing category position in the quarter and started to see signs of less aggressive pricing by some ridesharing competitors, which has continued into Q2 2019." - UBER is winning and has potential margin upside ahead of it.
  5. Something I missed earlier was the window for analyst initiations. With Lyft out of the way, analysts clearly felt charitable. Analysts were so bullish as a group that their calls delivered 2-day boost for UBER shares. This bullish consensus of course increases the risks for disappointment in the next earnings report.
  6. I put the odds of at least getting to even on my trade at 50/50 given the looming oversold trading conditions in the stock market. The market's relief rally placed an even stronger tailwind behind the stock that I could have anticipated.

Now that UBER managed to get back to its IPO price, I do not expect the stock to make much further gains in the coming weeks. The chart above shows how the stock rejected buyers three times from around the $45.60 level and closed twice right at $45…before succumbing on Friday to a 1.7% loss and a notable underperformance to the soaring market (the S&P 500 (NYSEARCA:SPY) gained 1.1% on the day). Perhaps some astute traders got whiffs of the news of imminent departures of UBER's COO and CMO. The stock dropped another 2% or so in the aftermarket on this news.

With UBER now valued at 6.4x sales, the shares are no longer a bargain, but a fresh bout of speculative fever in the general stock market could of course provide just enough momentum to push UBER to new all-time highs. If THAT happens, the stock is a "breakout buy" candidate with a stop below the low of the day of the breakout regardless of the proximity of earnings.

My base case is a rangebound stock given the near unanimity in bullishness from analysts. If the stock stays under $43 or so, I would be willing to make another bullish bet on earnings all else being equal. I will interpret a new all-time low as a red flag for earnings given the contradiction of that bullishness.

Be careful out there!

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in UBER over 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: Long LYFT calls and short LYFT puts.