“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, May 18, 2020

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

ALSO

"Trading Capital Management"



Option Trade – Square Inc (NYSE:SQ) Calls

Friday, May 22, 2020

** OPTION TRADE: Buy SQ SEP 18 2020 85.000 CALLS at approximately $9.00.

Place a pre-determined sell at $18.00.

Also include a protective stop loss of $3.60.

NOTE: We executed a trade on SQ earlier this year - Wednesday, January 08, 2020 – and quickly made 100%; and for those traders that held for more gains – reaching a maximum of 300%.

Preamble.....

Shares of payment processing and point-of-sale upstart Square Inc. (NYSE:SQ) rallied recently after the digital payments company posted its first-quarter earnings. Its revenue rose 44% annually to $1.38 billion, beating estimates by $80 million and exceeding its own guidance for 36%-40% growth.

Square's net loss widened from $38 million to $106 million, partly due to higher reserves for transaction and loan losses, as its adjusted EBITDA declined 85% to $9 million. It posted a non-GAAP net loss of $0.02 per share, which missed expectations by $0.15 and marked a steep drop from its profit of $0.11 per share a year ago.

Those numbers were mixed, but Square's business fared better than expected as the COVID-19 crisis halted payments at many of its small to medium-sized merchants. Square didn't offer any guidance for the second quarter or full year, but could see brighter days ahead as businesses reopen across America.

Square is a high-quality company that has managed to impress during these times. There are times in which quality is worth its steep price tag. This is the case for Square -- a point-of-sale and financial technology company whose revenue growth has soared in recent years.

Square has a strong competitive advantage in the form of a flywheel of products that serve sellers from many different touchpoints, including point of sale (hardware and software), working capital loans, payroll, menu management, third-party software integration, online stores, and more.

Square Set-up…..

Square's portfolio has two main segments. Its larger segment, Seller Ecosystem is still growing its revenue growth rates, but at a decelerating rate. 

It also has a smaller segment, Cash App, that accounts for approximately 33% of total gross profits and it's posting triple digits growth rates and showing no signs of slowing down any time soon.

It's still early days for its Cash App segment, but its performance looks very promising. 

The seller ecosystem provides merchants with point-of-sale solutions to allow credit transactions to process. What's most interesting about the seller side of the business is that it continues to attract larger and larger merchants, as evidenced by annual gross payment volume (GPV) totals. In the first quarter two years ago, merchants with less than $125,000 in annualized GPV made up 53% of seller ecosystem sales. Today, 53% of sales are made up by sellers with more than $125,000 in annual GPV.

Then there's Cash App, which has seen its member count more than triple over the past two years. The ability to invest directly from Cash App has spurred interest, as has the need to avoid contact during the COVID-19 pandemic. Users can send and receive money (including their stimulus checks) directly through Cash App. Square expects Cash App and usage of its associated Cash Card (which links to your Cash App balance) to be massive growth drivers in the years to come.

COVID-19 Effect…..

During the last two weeks of the tech company's first quarter, gross payment volume across its platform was down 39% year over year. But the company's broad base of services helped offset some of this pain. Revenue from its subscription and services-based offerings was still growing toward the end of the quarter, albeit at a decelerated rate. Further, online transactions across its platform were largely unaffected by COVID-19.

More importantly, Square saw a surge of interest in its products as companies turned to Square's platform to help them adapt. Indeed, early data on the sellers onboarding to the company's services since COVID-19 sent the economy reeling shows that they are, on average, larger on both a transaction volume and a gross-profit basis than seller sign-ups earlier in the year.

While COVID-19 will take a toll on Square's revenue growth in the near term, many of the company's services have notably become more mission-critical than ever. Square's suite of seller services combined with its point-of-sale offerings will position it well to gain market share from sellers as they adapt to these unusual times.

Analysts Reactions.....

Yesterday saw UBS analyst Eric Wasserstrom downgrade Square stock to sell from neutral while raising his price target to $63 from $54. He said that the downgrade reflects a "weak outlook" for Square's seller business and the limited visibility into its recovery trajectory. "More significantly, although we are increasing our price target to $63 to reflect a stronger outlook for Cash App, Square's current valuation exceeds this revised level, and, in our view, prices in an accelerated recovery in Seller volumes and revenues in most scenarios, an outcome we consider unlikely," Wasserstrom wrote.

Also, Jason Kupferberg of BofA Securities downgraded Square from Buy to Underperform with an unchanged $84 price target.

While stimulus funds may provide temporary relief, a significant number of small- and mid-sized businesses may struggle to remain afloat, especially if the economy reopens only partially, Kupferberg said in the Monday downgrade note.

Around 75% of Square’s payment volume comes from merchants with less than $500,000 in annual card volume, the analyst said. Despite this backdrop, the stock has outperformed the S&P500 by around 4,000 basis points so far this year, he said.

Although the consumer-facing Cash App business is performing well, the Seller segment represents around 70% of the company, Kupferberg said.

The reopening of the US economy is uneven, creating uncertainty around a recovery in Square’s gross payment volume, which the analyst said “will likely vary significantly across a range of spending categories.”

While expressing optimism over Square’s competitive positioning in the long-term, BofA said wrote the stock “has moved too far and too fast relative to its near-term fundamental prospects.”

So…..

These downgrades moved the stock price downwards by about 2% yesterday – but pre-market today, the stock is moving back up – the downgrades seem not to be that significant apparently, but does provide us with a better entry price.


Option Trade – Moderna Inc (NASDAQ: MRNA) Calls

Tuesday, May 19, 2020

** OPTION TRADE: Buy MRNA JUL 17 2020 100.000 CALLS at approximately $10.80.

Place a pre-determined sell at $22.00.

Also include a protective stop loss of $4.35.       

Preamble.....

Shares of Moderna Inc (NASDAQ: MRNA) surged 20% to a record $80 each yesterday – and there seems to be plenty left in the pipeline.

The biotech firm reported encouraging early trial results for an experimental Covid-19 vaccine.

Moderna, whose shares have more than quadrupled this year, released interim data from a small phase 1 trial showing positive early signs that the vaccine can create an immune system response to the virus in humans. The news helped fuel a broader surge in stocks, with the S&P 500 Index advancing 3.2%, the most since April 8.

The company priced a stock offering to fund manufacturing of its coronavirus vaccine at $76 a share, 5% below the last close, people familiar with the deal said after Monday’s market trading.

Shares in Moderna pulled back 3% in Monday’s after-hours trading, but are again, moving back upwards in pre-market trading.

The interim Phase 1 data, while early, demonstrates that vaccination with mRNA-1273 elicits an immune response of the magnitude caused by natural infection,” said Tal Zaks, Chief Medical Officer at Moderna.

“When combined with the success in preventing viral replication in the lungs of a pre-clinical challenge model at a dose that elicited similar levels of neutralizing antibodies, these data substantiate our belief that mRNA-1273 has the potential to prevent Covid-19 disease and advance our ability to select a dose for pivotal trials.”

The Testing.....

The biotech tested three dosing regimens of its coronavirus vaccine in healthy adults ages 18-55. Across all three groups, participants began showing began showing antibodies against Covid-19 by day 15 after receiving one dose. The presence of antibodies could indicate immunity.

In one group, patients received two doses of the coronavirus vaccine. At day 43, two weeks after receiving the second dose, the level of antibodies in participants' blood was similar to levels for patients who already recovered from Covid-19.

A second group received two higher doses of the coronavirus vaccine. At day 43, the antibodies in their blood exceeded that of recovered Covid-19 patients. The third group of patients received a single higher dose. Samples aren't yet available for those participants.

The trial is being conducted with the National Institute of Allergy and Infectious Diseases, and the company has received at least $483 million in federal funding for its vaccine candidate this year.

Going forward, the Phase 2 trial, which Moderna said has been approved by the Food and Drug Administration to begin “shortly,” will have two dosing levels (50 microgram and 100 microgram), bypassing a third dosing level (250 microgram) that was included in the first phase of testing. It plans to enroll 600 participants and is expected to begin this quarter. Moderna executives told analysts that they believe the dosing level that will make into the Phase 3 trial will be between 25 micrograms and 100 micrograms.

Analysts Reactions.....

Despite yesterday’s price jump the stock still shows a bullish Strong Buy consensus from the Street, with six analysts reiterating their buy ratings on Monday. That includes Needham’s Alan Carr who ramped up his price target all the way from $58 to $94.

“Based on these data, we believe the vaccine is likely to be found effective for prevention of infection in a Phase 3 trial” he explained. Carr believes a Phase 3 interim analysis by the end of 2020 appears feasible, which he says could be sufficient for FDA Emergency Use Authorization.

“Given collaboration with Lonza, we expect Moderna to have meaningful supply by 4Q20. We have therefore added an mRNA-1273 revenue stream to our model and are raising our price target to $94” the analyst writes.

So…..

Despite the fact that we missed the boat yesterday, it appears that there will still be plenty of movement upwards as the progress on the vaccine continues.