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Is Twitter Inc Stock Headed to $40 Following Earnings?

Joseph Hargett

We are less than a week away from another quarterly earnings report from social media challenger Twitter Inc (NYSE:TWTR). Morgan Stanley put Twitter stock in the spotlight this week, boosting its price target of user and revenue growth expectations.  Now it’s up to Twitter to prove it’s worth.

On average, analysts are expecting Twitter to post a profit of 11 cents per share on revenue of $605.26 million. Compared to last year, these figures are up 57% and 10.4%, respectively. EarningsWhispers.com, meanwhile, reports a whisper number of 15 cents per share. Clearly, expectations are much higher than officially reported.

But there is somewhat of a disconnect between recent optimism in the financial media, the whisper earnings figure and current rankings from the brokerage community. In fact, Thomson/First Call reports that only four of the 36 analysts following TWTR stock rate it a “buy” or better. The consensus 12-month price target rests at $27.52, a discount to yesterday’s close.

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The disconnect between the recent rise in bullish sentiment and analysts rating can be summed up in Morgan Stanley’s recent analysis. According to the brokerage firm, there is a very bullish case to be made for Twitter stock, if the company can further boost user growth further and display more innovation. In fact, Morgan Stanley sees TWTR reaching $40 in this scenario.

In layman’s terms, these comments indicate that quite a few brokerage firms are waiting for current trends to manifest in Twitter’s earnings report. As a result, next week’s trip to the earnings confessional could be a major bullish opportunity for Twitter stock, if the company can deliver.

Twitter Stock

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TWTR stock is also in a position to see significant follow-through buying in the event of a positive earnings reaction. The shares attempted to take out resistance at their 50-day moving average in the wake of the Morgan Stanley bullish note, but buying support just isn’t there so far. Technical support lies at $30, however, so Twitter stock should hug its 50-day trendline until after earnings.

On the options front, speculative traders are quite bullish heading into Twitter’s quarterly report. Currently, the weekly April 27 put/call open interest ratio comes in at 0.38, with calls nearly doubling puts among options most affected by Wednesday’s report.

As for implieds, April 27 options are pricing in a big post-earnings move of nearly 13%. As a result, the upper bound lies at $35.50 and the lower at $27.47.

2 Trades for Twitter Stock

Call Spread:  Given that Twitter stock jumped sharply yesterday, I wouldn’t be surprised to see the shares drift lower heading into earnings. This would set up a bullish post-earnings options trade nicely — you just have to pick your entry point. Right now, the weekly April 27 $34.50/$35 bull call spread can be had for 11 cents, or $11 per pair of contracts. If TWTR declines today, you can probably do better on the entry price.

Running with what we have, breakeven lies at $34.61, while a maximum profit of 39 cents, or $39 per pair of contracts — a potential return of 250% — is possible if Twitter stock closes at or above $35 when April 27 options expire.

Put Spread:  On the other hand, the recent run higher (and mediocre earnings) could prompt the shares to flatline … or worse, fall sharply on profit taking. Traders taking a bearish angle might want to consider a weekly April 27 $28/$29 bear put spread. At last check, this spread was offered at 29 cents, or $29 per pair of contracts.  Breakeven lies at $28.71, while a maximum profit of 71 cents, or $71 per pair of contracts — a potential return of more than 140% — is possible if Twitter stock closes at or below $28 when April 27 options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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