Zoom (ZM) FQ3 Earnings Preview / Trade Ideas

by Dan November 30, 2020 11:29 am • Trade Ideas

Zoom (ZM) will report its fiscal Q3 results today after the close. The options market is implying about a 14% move in either direction (or about $66) which is essentially in line with its average one-day post-earnings move since going public in mid-2019 but massively skewed by last quarter’s 40% one day gap.

Shares of ZM are up ~600% on the year, sporting a market cap of $135 billion, down about 19% from its all-time high made in mid-October when the stock’s market cap was greater than that of Cisco Systems (CSCO). ZM trades ~53x expected FY21 sales of $2.4 billion and ~43x expected FY 2022 sales of ~$3.1 billion. For comparison’s sake, ServiceNow (NOW) an enterprise cloud software provider with a $103 billion market cap trades 23x its expected $4.5 billion in sales this year (30% growth) and 18,5x next year’s expected $5.6 billion (25% growth).

As my good friend Carter Braxton Worth of Cornerstone Macro Research likes to say “I don’t make up the lines, the lines draw themselves”. The uptrend from the lows in late Spring intersect with this month’s low near $375. The bounce from that level over the last few week’s resulted in a break of the very sharp downtrend from the Oct highs that resulted in a peak to trough decline of 40%:

A failure below the recent downtrend will likely cause a retest of the Nov lows near $375 and then possibly an attempt to fill in the Q2 earnings gap. To the upside, resistance comes near the pre-vaccine high on Nov 6th near $500, and of course the next massive resistance level at the all-time high of $589.

Despite the stock’s eye-popping performance, Wall Street analysts are fairly mixed on the stock with 12 Buy ratings, 14 Holds, and 4 Sells with an average 12-month price target of about $462, very near where the stock is trading. Valuation is largely the issue here for most, while those who maintain buys and higher price targets see a massive addressable market beyond the pandemic as work and school have likely been changed for good.

Tonight’s earnings are likely to be very solid, but after last quarter’s beat, commentary, and 40% gap, I think it is safe to say expectations are extremely high in a fairly well-understood story. It is also worth noting that the stock’s downtrend started after a euphoric two-month rise that saw the stock double, but came to a screeching halt with the growing optimism about C19 vaccines. On each piece of vaccine news, the stock has suffered another leg lower.

Frankly, I would be shocked if the stock is able to put together a sustainable multi-day move higher, maybe a gap and crap, squeeze the shorts, and then fill in the gap. But if the company were to miss and offer an outlook or general commentary that does not live up to expectations the stock is headed back to support between $375 and $350.

So what’s the trade?

If I am long, don’t want to sell this year and pay taxes on gains, and more worried about extreme downside than extreme upside in the near term then I consider a collar, selling a put of the money call and using the proceeds to buy and out of the money put. This hedge structure allows for gain up to the short call strike, losses down to the long put strike, but protected below, for instance:

Hedge Idea: vs 100 shares of ZM long at $475, Buy Dec 430 – 535 collar for even

-Sell to open 1 Dec 535 call at ~$21

-Buy to open 1 Dec 430 put for ~$21

Break-even on Dec expiration:

Profits of the stock up to $530. At or above 530, 100 shares of stock (per 1 call short) would be called-away. If the stock is at or above $535 on Friday, Dec 18th you could always cover the short 535 call to keep the long position intact.

Losses of the stock down to 430 but protected below.

Rationale: collars make sense for long holders who are more worried above extreme near-term volatility to the downside over extreme upside, usually into an event like earnings. This hedge structure allows for the potential of $60 of gains between now and Dec 18th expiration and $45 of losses. One can see that puts are cheaper than calls, as the price of the call that is $60 away from spot is equal to that of the put that is only $45 dollars away.

 

Or for those looking to play for a disappointment, consider put spreads in Dec expiration:

Bearish Trade Idea: ZM ($475) Buy Dec 450 – 350 put spread for $25

-Buy to open 1 Dec 450 put for 30

-Sell to open 1 Dec 350 put at $5

Break-even on Dec expiration:

Profits of up to 75 between 425 and 350 with max gain of 75 at 350 or lower

Losses of up to 25 between 425 and 450 with max loss of 25 at or above 450

Rationale: this trade risks 5% of the stock price, breaks-even down 9.5%, and has a max gain of 16% of the stock price if the stock is down 25% in a little less than 3 weeks. The options market is suggesting about a 30% chance this trade is break-even on Dec expiration, 21% chance that it is a double at 400, and about a 10% chance that it is worth 75. These are not great odds, which is one of the reasons why it takes strong conviction to take long premium directional trades into events like earnings in names like ZM where options prices are very high, you need to get a lot of things right to merely break-even on expiration, first and foremost direction, then magnitude of the move and of course timing.

 

OR if I were inclined to play for a beat and raise and sharp rally I would merely risk what I am willing to lose and buy near the money weekly calls in the weeklies. For instance, the Dec4th weekly 475 call vs stock at $475 is offered at $33, if you bought just 1 contract it would cost you $3300, and you would need a rally above $508 by this Friday’s close to just break-even. THIS IS NOT A GREAT WAY TO TRADE OPTIONS, it is gambling with worse odds than most table games at a casino.