Visa's Coronavirus Sell-Off May Be Overblown
- Visa pre-announced its fiscal second quarter.
- The pre-announcement doesn't add up the impact on the stock.
- Traders appear to be betting the stock rises sharply by June.
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Visa (NYSE:V) shares have been hammered during this coronavirus led stock market sell-off. But the sharp declines may not be justified based on the current changes in fiscal second-quarter guidance the company issued the other day. The revenue adjustment seems minuscule when compared to the more than $50 billion loss in market value.
Some options traders are betting that Visa's stock rebounds by the middle of June, suggesting that the stock rises to around $211 from its current price of about $188. You can now track all of my free articles on Seeking Alpha on this Google Spreadsheet I have created.
Visa announced on March 2 that it would not meet its prior revenue guidance and instead saw growth being below its previous guidance by 2.5 to 3.5 percentage points. The company had been looking for growth in the low double digits and modestly better than the fiscal first quarter. More importantly, analysts had been looking for the company to have revenue of $6.11 billion in the second quarter. Since the pre-announcement, analysts have adjusted their revenue estimates to $5.99 billion. In essence, revenue estimates for the quarter have fallen by just 1.8%.
Meanwhile, revenue estimates for the year have fallen by 70 basis points since their peak at that end of January to $25.3 billion.
If you are wondering how this minimal impact on the company's revenue has resulted in the stock's market cap declining by more than $50 billion, it is an excellent question. It is likely the reason why some traders are betting that the shares rebound by the summer.
Betting Shares Rise
The calls for expiration on June 19 increased by almost 9,000 contracts at the $205 strike price on March 3. According to the data from Trade Alert, the calls were bought on the ASK for about $5.50 per contract. It means that the stock would need to rise to around $210.50 by the middle of June, or about 11.2%, from its current price of about $189.40 on March 5. It is a massive bet, too, with the calls costing almost $5 million to buy. It means that, if the stock fails to reach that strike price by the expiration date, the trader could lose their entire bet.
The stock found a meaningful level of technical support at $172 and has been trending higher since. Currently, the next significant level of technical resistance does not come until approximately $200.
There are still plenty of risks that remain. Although the impact on the company in this current fiscal second quarter appears to be minor, we cannot be sure how much damage the company may incur in the fiscal third quarter. Additionally, the stock is trading with a great deal of market momentum. That means the stock may remain detached from the fundamentals for some time to come.
Overall, if the coronavirus turns out to be a smaller impact on the business than the market is currently assuming, which appears to be a case scenario, then the options trader making the big bets may end up being happy customers.
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About The Author
I first fell in love with the stock market when I was 16 years. Now, 25 years later and after a long career as a buy-side trader, I share all of my experience with you daily with timely thoughts throughout the day in Reading The Markets. I use fundamental, technical, and options market analysis to identify individual stock ideas for you.
This article was written by
I am Michael Kramer, the founder of Mott Capital Management and creator of Reading The Markets, an SA Marketplace service. I focus on long-only macro themes and trends, look for long-term thematic growth investments, and use options data to find unusual activity.
I use my over 25 years of experience as a buy-side trader, analyst, and portfolio manager, to explain the twists and turns of the stock market and where it may be heading next. Additionally, I use data from top vendors to formulate my analysis, including sell-side analyst estimates and research, newsfeeds, in-depth options data, and gamma levels.
Analyst’s Disclosure: I am/we are long V. 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.
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