“Armchair Trader Series”  Recommendations
- Week Beginning -
Monday, February 05, 2018

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy


Option Trade - Tesla Inc. (NASDAQ:TSLA) Puts

Tuesday, February 06, 2018

** OPTION TRADE: Buy the TSLA FEB 16 2018 310.000 PUT at approximately $5.00. Place a pre-determined sell at $10.00.

Also include a protective stop loss of $2.00.

The maker of electric cars Tesla Inc. (NASDAQ:TSLA) is set to report Q4 results after the market close Wednesday, and the consensus is for per-share losses to widen to $3.18 from 69 cents a year ago, with revenue up 45% to $3.3 billion. There are only 3% of analysts that view Tesla as beating earnings expectations.

Consensus estimates are for earnings to decline year-over-year by 761.11% with revenue increasing by 44.44%.

On average, analysts expect that Tesla will report full year earnings of ($8.66) per share for the current financial year, with EPS estimates ranging from ($9.33) to ($8.25). For the next financial year, analysts expect that the firm will report earnings of ($3.87) per share, with EPS estimates ranging from ($8.29) to ($1.04).

Overall earnings estimates have been revised lower since the company's last earnings release.

There's still a lot of uncertainty around Tesla, from its business model to its long-term plans to its giant Gigafactory.

The report comes at a highly important time, namely the production ramp of its Model 3. Tesla has a target to produce 2,500 Model 3 sedans per week sometime in Q1 and 5,000 per week in Q2 after getting off to a slow start last year.

Costs probably spiked because of the expensive ramp-up of production for the Model 3, Tesla's first entry into the mass-market car segment. These struggles could see Tesla booking a non-GAAP loss of as much as $3.70 per share, compared with a $0.69-per-share loss a year ago.

Tesla has had to lower its outlook on this key point twice, and so continued production delays will probably drive reduced sales growth and lower profitability.

Tesla has a 52-week low of $229.59 and a 52-week high of $389.61. The company has a debt-to-equity ratio of 1.66, a quick ratio of 0.71 and a current ratio of 1.09. The stock has a market cap of $56,510.00, a PE ratio of -39.28 and a beta of 0.94.

Influencing Factors

The company has already suffered something of a setback in the form of new tariffs on imported solar panels. According to the Solar Energy Industries Association, which represents solar installers such as Tesla's SolarCity, the tariffs will cause "unfortunate" near-term impacts for the industry.

Of course, SolarCity represents a small fraction of Tesla's operations, but there's risk associated with the rest of the company as well. Tesla's debt has skyrocketed in recent years to nearly $10 billion, while its free cash flow is negative and getting more negative with each passing year.

Then there's the question of valuation. With negative earnings, neither Tesla's P/E ratio nor its enterprise value-to-EBITDA ratio can be measured against its peers. But there's no doubt that its valuation has skyrocketed along with its stock price.

Analysts and Hedge Funds Opinions

Tesla was upgraded by investment analysts at BidaskClub from a “sell” rating to a “hold” rating in a research note issued to investors last Wednesday.

Also, several other equities analysts have recently commented on the company…..

  • Vetr raised Tesla from a “sell” rating to a “hold” rating and set a $336.07 target price for the company in a research report on Monday.
  • Zacks Investment Research downgraded Tesla from a “hold” rating to a “sell” rating in a research report on Saturday, January 20th.
  • Barclays reaffirmed a “sell” rating on shares of Tesla in a research report on Sunday, October 15th.
  • Finally, Piper Jaffray Companies set a $386.00 target price on Tesla and gave the stock a “buy” rating in a research report on Monday, October 16th.

Eleven analysts have rated the stock with a sell rating, thirteen have assigned a hold rating and eleven have issued a buy rating to the stock. Tesla currently has a consensus rating of “Hold” and an average price target of $314.17.

Institutional investors that have recently made a change to their positions in the stock….

Chevy Chase Trust Holdings Inc. lessened its holdings in shares of Tesla by 19.3% in the fourth quarter. The institutional investor owned 1,279 shares of the electric vehicle producer’s stock after selling 305 shares during the quarter.

Insider news……

  • Director Kimbal Musk sold 4,065 shares of the stock in a transaction dated Tuesday, January 2nd. The shares were sold at an average price of $312.08, for a total value of $1,268,605.20.
  • VP John Douglas Field sold 600 shares of the company’s stock in a transaction that occurred on Thursday, November 2nd. The shares were sold at an average price of $301.60, for a total value of $180,960.00.
  • Also, VP Eric Branderiz sold 1,736 shares of the company’s stock in a transaction that occurred on Tuesday, October 24th. The stock was sold at an average price of $339.49, for a total transaction of $589,354.64.

 Harvey’s Options Volatility Indicator

Summary

The company’s gross margins are likely to suffer due to higher costs related to its Model 3 production ramp-up.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the TSLA FEB 16 2018 310.000 PUT at approximately $5.00. Place a pre-determined sell at $10.00.

Also include a protective stop loss of $2.00.

 


Option Trade - Activision Blizzard, Inc. (NASDAQ:ATVI) Calls

Monday, February 05, 2018

** OPTION TRADE: Buy the ATVI MARCH 16 2018 75.000 CALL at approximately $2.40. Place a pre-determined sell at $4.80.

Also include a protective stop loss of $0.95.

Activision Blizzard, Inc. (NASDAQ:ATVI), a publisher of online, personal computer, console, handheld, mobile and tablet games, is confirmed to report earnings on Thursday, February 8, 2018, after the market closes. The consensus earnings estimate is $0.94 per share on revenue of $2.55 billion and the Earnings Whisper number is $0.98 per share.

Activision has beaten its own forecast in each of the last seven quarterly outings.

Shares of ATVI have gained more than 13% over the past four weeks. Activision's strong release schedule, including the debut of Call of Duty: WWII should propel results for the quarter. Call of Duty: WWII reportedly generated $500 million in its first three days of release.

Not only did Activision Blizzard see its price rise more than 20%, on its way to a 2017 gain of 75%, but there's also plenty of growth left. Activision is a wildly successful standalone interactive entertainment company, with franchises including Call of Duty, Destiny, World of Warcraft, and Overwatch, among many others.

ATVI is the type of stock that always sports a premium valuation relative to the market thanks to its strong content portfolio that produces healthy cash flows year in and year out. Investors have grown accustomed to paying a premium for that consistent cash flow.

Moreover, ATVI had a really good quarter thanks to Call of Duty. Also, early viewership numbers for Overwatch League have been much better than anyone expected.

Management will talk up the potential of Overwatch League on the call. The combination of CoD strength and Overwatch League potential will boost investor enthusiasm. That will spark multiple expansions, and ATVI stock will soar higher.

Activision Blizzard, Inc. has a 1-year low of $38.93 and a 1-year high of $74.94. The company has a current ratio of 2.25, a quick ratio of 2.22 and a debt-to-equity ratio of 0.44. The stock has a market capitalization of $54,000.00, a price-to-earnings ratio of 48.92, a price-to-earnings-growth ratio of 2.09 and a beta of 1.11.

Influencing Factors

Activision Blizzard had a big autumn, with major releases on console of Destiny 2 and Call of Duty: WWII. In October, Destiny 2 was released on PC, marking the debut of that franchise on PC. There was also plenty of in-game content released across Overwatch, Destiny 2, Hearthstone, and game developer King's mobile titles.

Driving forces behind Activision that should propel it to new heights are:-

1. Microtransactions - rival Electronic Arts recently learned with its troubled rollout of the Star Wars: Battlefront game that players weren't happy with their in-game spending choices, so EA had to suspend microtransactions for the title while promising to fix issues with the system.

Activision Blizzard didn't have a similarly high-profile stumble, and its biggest release of the year, Call of Duty: WWII, seemed to go off without a hitch. Thus, the developer will likely report encouraging operating metrics on Tuesday. Both the Activision and the Blizzard sides of the business set new third-quarter records for audience size back in November, after all, and that lift helped power over $1 billion of in-game spending.

2. Professional Competitive Gaming -- the driving force that could really turn Activision into a wealth-creating machine for investors. Overwatch has been a huge success in the esports megatrend, and Activision owns four games in the top 10 of Twitch's most watched esports. Investors are just beginning to understand the potential of esports, which drives incredible engagement and competitive activity for franchise games. It also opens the door for Activision to delve into consumer products, from team jerseys to customized gaming equipment.

Analysts and Hedge Funds Opinions

Thanks to positive results from Electronic Arts (EA), which surged more than 7% on last week’s earnings, Activision rose to all-time highs. Citing strong holiday sales for hits such as Call of Duty: WWII, analyst Robinson Humphrey of SunTrust lifted his Q4 estimates for Activision to a price target to $77 from $72, implying 11% premium from current levels.

Also, Needham analyst Laura Martin raised her price target on ATVI shares to $80 from $75 last week. Fellow videogame firm EA delivered strong growth in its "live services" business, which has been a boon to the industry lately. Meanwhile, Martin increased her earnings, free-cash-flow, and valuation estimates for Activision in anticipation of benefits from tax reform. She sees Activision's assumed book tax rate falling to 12% from 24%. "Activision remains a top pick among our media companies under coverage owing to its deep library of proprietary IP content, its (very) long sequel life-spans, rising margins, limited piracy, and relatively predictable revenue streams," Martin wrote.

Also, several other equities analysts have recently commented on the company…..

  • Stifel Nicolaus reiterated their buy rating on shares of Activision Blizzard in a research report released on Thursday. They currently have a $77.00 price objective on the stock.
  • Morgan Stanley upped their price objective on Activision Blizzard from $70.00 to $72.00 and gave the company an “overweight” rating in a research note on Friday, November 3rd.
  • Jefferies Group lifted their price target on Activision Blizzard from $80.00 to $82.00 and gave the company a buy rating in a research report on Friday, November 3rd.
  • BTIG Research started coverage on Activision Blizzard in a research report on Monday, December 18th. They issued a buy rating and an $80.00 price objective for the company.
  • Sanford C. Bernstein began coverage on Activision Blizzard in a research note on Thursday, January 18th. They issued a “market perform” rating and a $74.00 price objective on the stock.
  • Wedbush set a $75.00 price objective on Activision Blizzard and gave the company a “buy” rating in a research note on Thursday, January 11th.
  • Finally, Goldman Sachs Group upgraded Activision Blizzard from a “neutral” rating to a “buy” rating in a research note on Tuesday, December 12th.

Activision Blizzard, Inc. has been assigned an average rating of “Buy” from the thirty-two ratings firms that are covering the stock. Seven investment analysts have rated the stock with a hold recommendation and twenty-five have given a buy recommendation to the company. The average 12-month target price among brokers that have covered the stock in the last year is $75.19.

Institutional investors that have recently made a change to their positions in the stock….

  • Fox Run Management L.L.C. purchased a new stake in shares of Activision Blizzard, Inc. during the 4th quarter. The fund purchased 11,542 shares of the company’s stock, valued at approximately $731,000.
  • Franklin Resources Inc. increased its stake in Activision Blizzard by 891.4% during the second quarter. Franklin Resources Inc. now owns 255,245 shares of the company’s stock valued at $14,695,000 after acquiring an additional 229,500 shares during the period.
  • PNC Financial Services Group Inc. grew its stake in shares of Activision Blizzard by 12.6% in the 2nd quarter. PNC Financial Services Group Inc. now owns 83,248 shares of the company’s stock valued at $4,792,000 after purchasing an additional 9,329 shares during the period.
  • Thrivent Financial For Lutherans grew its stake in shares of Activision Blizzard by 3.1% in the 2nd quarter. Thrivent Financial For Lutherans now owns 26,555 shares of the company’s stock valued at $1,529,000 after purchasing an additional 805 shares during the period.

Harvey’s Options Volatility Indicator

Summary

Activision was an excellent investment in 2017 and has proved it can make engaging and brilliant games. If it can figure out how to optimally monetize microtransactions and increase its exposure to the esports trend, there's no way this stock is slowing down.

Don't be surprised if Activision beats expectations. Management has a history of under-promising and over-delivering. Even Wall Street analysts have had a hard time keeping up with Activision's momentum. The game maker has handily beat Wall Street's expectations the last four quarters in a row, and management has raised its outlook every quarter in 2017 based on better-than-expected results.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the ATVI MARCH 16 2018 75.000 CALL at approximately $2.40. Place a pre-determined sell at $4.80.

Also include a protective stop loss of $0.95.





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