For investors in the social media platform Twitter (NYSE:) 2021 was not a good year. The stock is down about 19.4% so far.
On Feb. 25, TWTR shares traded over $80 and hit an all-time high. But since that high, the stock has lost about 45%; it closed at $44.37 yesterday. The stock's 52-week range has been between $41.01 – $80.75, and its market cap (cap) as of Tuesday is $35.41 billion.
The San Francisco-based company released third-quarter financial data on Oct. 26. It was $1.28 billion, compared to $936 million a year ago. Of total revenues, $1.14 billion came from the advertising side, up 41% year-over-year, with the rest of the revenue coming primarily from data licenses.
The majority of Twitter's advertising revenue comes from services and digital goods. Therefore, supply chain issues that affected revenue for Meta Platforms (NASDAQ:) or Snap (NYSE:) have not negatively impacted Twitter.
Adjusted profit was 18 cents versus analysts' expectations of 15 cents. Meanwhile, Twitter received 211 million daily active users (mDAU), up 13% from a year ago.
The company's revenue forecast for the fourth quarter of 2021 is between $1.5 and $1.6 billion. Prior to the release of quarterly results in late October, TWTR shares traded at the $60 level. As we write, they hover around $44.
Since then, the platform's co-founder, Jack Dorsey, has also stepped down as CEO. Now Parag Agrawal, who was formerly the chief technology officer, is at the helm. In the future, Agrawal is expected to put more emphasis on blockchain technologies. .com, Twitter shares received a "neutral" rating.
Chart: Investing.com
Analysts also have a median 12-month price target of $63.94 for the stock, representing an increase of more than 63% from current levels. The 12 month price range is currently between $15.00 and $85.00.
According to a number of valuation models, such as those considering P/E multiples or the 10-year Discounted Cash Flow (DCF) growth exit method, the average fair value for TWTR shares is $46.20, which is represents a 7.5% upside potential, ie a more modest price increase from where the stock is now.
Graph: InvestingPro
In addition, we can determine the financial health of the company by ranking it on more than 100 factors relative to peers in the communications services sector. In terms of growth, cash flow and health of price momentum, Twitter scores 3 out of 5 (top score). Overall performance is also ranked 3 (“fair”).
P/B and P/S ratios for TWTR stocks are 4.9x and 7.3x, respectively. By comparison, those stats for peers are 4.4x and 3.5x.
Finally, readers who view technical charts may be interested to know that several short- and medium-term indicators of TWTR stocks provide oversold signals. In other words, the decline in stocks could come to a halt soon.
Given the recent significant drop in price, our first expectation is that TWTR stocks will begin to stabilize in the coming days and trade in a range, possibly between $40 and $45. Once Twitter stock has a new footing, there will likely be start an increase. If you're moving up in the coming weeks, consider selling a cash-backed put option in Twitter stock – a strategy we cover regularly. Because it concerns options, this setup is not suitable for all investors.
Let's assume an investor wants to buy Twitter stock, but not pay the full price of $44.37 per share. Instead, the investor would prefer to buy the shares at a discount in the coming months.
One option would be to wait for TWTR stocks to fall, which may or may not be. The other option is to sell one contract of a cash-backed Twitter put option.
So the trader would normally write an at-the-money (ATM) or an out-of-the-money (OTM) put option while simultaneously setting aside enough money to buy 100 shares of the stock.
Let's assume the trader executes this trade until the option's expiration of February 18, 2022. Since the stock is $44.37, an OTM put option would have a strike of $40.00.
Thus, the seller would have to buy 100 shares of TWTR at the $40.00 strike if the buyer of the option were to exercise the option to allocate it to the seller.
The TWTR February 18, 2022 40.00 strike put option is currently offered at a price (or premium) of $2.15.
An option buyer would have to pay $2.15 X 100, or $215, in premium to the option seller. This premium amount belongs to the option seller, no matter what happens in the future. The put option will stop trading on Friday, February 18.
The seller's max profit is this premium amount if the TWTR shares close above the strike price of $40.00. If that happens, the option will expire worthless.
If the put option is 'in the money' (meaning that the market price of Twitter shares is below the strike price of $40.00) before or upon expiration on February 18, this put option can be assigned. The seller would then be required to buy 100 Twitter shares at the put option's strike price of $40.00 (i.e. $4,000 in total).
The breakeven point for our example is the strike price ($40.00) minus the option premium received ($2.15), i.e. $37.85. This is the price at which the seller would lose money.
Cash-secured put selling is a fairly more conservative strategy than buying a company's stock at the current market price. This could be one way to capitalize on any jerkiness in Twitter stocks in the coming weeks.
Investors who end up owning TWTR shares as a result of selling puts may further consider setting up covered calls to increase the potential return on their shares. Thus, selling cash-backed puts could be considered the first step in owning stock.
