“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, July 09, 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!

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Option Trade – Tripadvisor Inc (NASDAQ:TRIP) Calls

Thursday, July 12, 2018

** OPTION TRADE: Buy the TRIP AUG 17 2018 60.000 CALL at approximately $3.20. Place a pre-determined sell at $6.40.

Also include a protective stop loss of $1.30.

Online travel company Tripadvisor Inc (NASDAQ:TRIP) saw their price target boosted by $21 to $70 -- the highest among brokerages providing coverage -- after Barclays analyst Deepak Mathivanan upgraded the travel name to "overweight" from "equal weight," yesterday. The stock defied broad-market headwinds closing the day at $58.67, up $1.08 or 1.88%.

Barclays has always found TripAdvisor’s value proposition and competitive positioning attractive, but remained “on the sidelines” about how the company would navigate monetization headwinds, Mathivanan said in the upgrade note.

After a reset in the second half of 2017, TripAdvisor’s monetization rates seem on track to experience growth in the third quarter and will benefit from user experience improvements in mobile and desktop, the analyst said.

“We expect TRIP’s mobile traffic to soon inflect from being a headwind to a tailwind on overall monetization rates, as mobile overtakes desktop in hotel shoppers sometime in early 2019."

Despite Street concerns, TRIP could maintain or gain market share as ROIs improve, Mathivanan said.

It is one of the few players with “meaningful” organic traffic and faces increasingly favorable secular trends, the analyst said.

Mathivanan said he expects the company’s non-hotel segment to evolve as a leader in the more than $100-million attractions market.

TripAdvisor stock has been red-hot in 2018, with most of that coming from May 1, 2018 onward, where it briefly surpassed the $60 per share mark. TRIP has added 71.5% and has culminated in an annual high of $60.12 on June 19. The shares subsequently pulled back to their 30-day moving average, but are now back within striking distance of new-high territory.

The outperforming travel stock is incredibly underloved by analysts. Of the 22 brokerages covering TRIP, a shocking 21 rate it a "hold" or worse. Furthermore, TRIP's average 12-month price target of $46.04 represents a 21% discount to the stock's current perch. This indicates there is ample room aboard the bullish bandwagon, and a round of additional upgrades and price-target hikes could push TRIP shares even higher.

A continued short squeeze could also provide more tailwinds for the equity. Short interest fell by 15% in the most recent reporting period, yet the 18 million shares still sold short represent nearly 17% of TRIP's total available float. At the stock's average daily trading volume, it would take more than a week for shorts to buy back their shares.

Based upon the latest earnings report which showed improvement in its hotel business for the second quarter in a row, its improved desktop-to-mobile ratio, and a rapidly growing attractions business, the next earnings report will reinforce its turnaround is sustainable, and the shorts will continue to scramble to cover their positions; something some are already doing. That is likely to result in a short-term positive catalyst.

And if the company does report another decent quarter, that momentum should continue on. This is a high-margin business, which throws off a lot of free cash flow. Assuming it maintains that performance; future growth will directly positively impact its bottom line and cash position.

Influencing Factors

In the last earnings report, management reported the engagement of its loyal user base improved, with the community increasing the number of reviews and opinions to 630 million, up 26 percent, with its monthly user base climbing to 433 million, a gain of 12 percent. That was driven a lot by the growth in the use of mobile devices, which now accounts for over 50 percent of its user base.

The strong user base of TRIP, along with its move to mobile with its hotel business, means it lessens its risk exposure to Google, which many believe could be disruptive to its business model.

With the company lowering ad spend and doing better than expected in the last quarter, it appears it is in fact less exposed to Google with its loyal user base and transition to mobile than before the company took that step.

If TripAdvisor can continue to improve the user experience and keep them on the app, it has a much stronger competitive position against Google than the market gives it credit for.

In the last earnings release, the company revealed the ongoing pace of growth in its non-hotel business, which includes things like reservations for restaurants and tours; and there is nothing to suggest that this scenario has changed.

The experiences and restaurants is the major driver of growth for the company, but with the scale of its mobile business rising quickly, it's only a matter of time before its hotel business returns to profitability on a consistent basis.

Looking ahead…..

Particularly encouraging for investors is that management raised its adjusted EBITDA guidance from flat for the year to positive in its most recent earnings report, and it also said it expected revenue trends to improve later in the year.

While the company's P/E ratio has ballooned with this year's growth and is now above 50, TripAdvisor, with its strength in recommendations, is unique among online travel agencies. If momentum continues to build, the stock could easily move higher.

Summary

The non-hotel businesses and the continuing migration to mobile by consumers provide a good opportunity from the point of view of margins. The growth in its attractions and restaurants businesses represent wide margin sales which the company believes it can sustainably generate in a range of "mid-to-high 20s% EBITDA margins." It also sees "very healthy P&Ls" as a result of that.

With the scalability inherent in the cost structure, it appears TripAdvisor has the ability to meet those margin expectations, and possibly exceed them. This would further add to its already robust free cash flow.

Tripadvisor has a market cap of $7.90 billion, a P/E ratio of 117.15, a PEG ratio of 5.41 and a beta of 1.89. Tripadvisor Stock has a 1 year low of $29.50 and a 1 year high of $57.94.


Option Trade – Microsoft Corporation (NASDAQ:MSFT) Calls

Wednesday, July 11, 2018

** OPTION TRADE: Buy the MSFT SEPT 21 2018 105.000 CALL at approximately $2.40. Place a pre-determined sell at $4.80.

Also include a protective stop loss of $0.95.

Microsoft Corporation (NASDAQ:MSFT), the tech titan, will be the first big tech company to report when it releases its fiscal fourth-quarter results on July 19, after the market closes. The company will post its numbers after the market close, with the consensus calling for earnings of $1.08 per share, up from $0.98 during the same period last year.

Microsoft has made itself a household name and is showing no signs of stopping its empire's reach anytime soon. The stock has amassed seven buys in the last 30 days and is a favorite among Wall Street analysts, with 16 buys total over the last three months.

Morgan Stanley analyst Keith Weiss says the tech king is poised for the kind of Netflix like triumph down the line in the world of gaming; and believes that this valuable tech player is underestimated by the Street, especially considering the company could yield substantial earnings gains by 2021 to 2023.

In fact, the analyst bets the company has stellar odds to score a $1 trillion market cap in a year's time. Weiss reiterates an "Overweight" rating on Microsoft's stock with a $130 price target, believing the company boasts 27% in upside potential.

"While continuing to invest and grow the traditional console-based business, the emerging opportunity for Microsoft is building the 'Netflix of Gaming' - a subscription gaming service offering subscribers access to a broad range of gaming content, across any device they choose, for a flat subscription fee," contends Weiss, who sees the company in robust standing when it comes to "the future of gaming."

Shares of Microsoft have gained 48.4% in the past year, substantially outperforming the industry 's rally of 35.6%. This outperformance can primarily be attributed to its continuous efforts in strengthening artificial intelligence ("AI") and Internet of Things ("IoT") based capabilities. Undisturbed focus on Azure continues to remain a key catalyst.

Influencing Factors

Microsoft is trying to fortify its presence in the EdTech market by driving innovation in both hardware and software categories.

The company acquired Flipgrid in the past month to counter Google's Classroom app, and other players in the arena. In a bid to further expand customer base, Microsoft is making the app free of cost for schools.

Microsoft is active in the higher education market as well. The company focuses on developing software expertise among youth which enables them to build and enhance their professional career.

Also, Github buyout will enable the company to enrich its machine learning base further, and improvise the professional programs accordingly, among other aspects. The company conducts various professional courses across EdX, Coursera, among others.

Now with the new Surface Go, Microsoft aims to strengthen its core competency in the low-end personal computing market, which augurs well in the longer haul.

Analysts and Hedge Funds Opinions

Sanford C. Bernstein reaffirmed their buy rating on shares of Microsoft in a research note published last Tuesday morning. The brokerage currently has a $123.00 target price on the software giant’s stock.

Several equities analysts have recently commented on the company…..

  • TheStreet raised Microsoft from a c+ rating to an a- rating in a research note on Thursday, April 26th.
  • Credit Suisse Group reissued a buy rating and set a $115.00 price target on shares of Microsoft in a research note on Thursday, April 12th.
  • William Blair reissued a buy rating on shares of Microsoft in a research note on Wednesday, March 21st.
  • Deutsche Bank set a $120.00 price target on Microsoft and gave the company a buy rating in a research note on Monday, March 12th.
  • MED reaffirmed a “buy” rating on shares of Microsoft in a research note on Tuesday, May 8th.
  • Stifel Nicolaus upped their target price on Microsoft from $105.00 to $107.00 and gave the stock a “buy” rating in a research note on Friday, April 27th.
  • Oppenheimer reaffirmed a “buy” rating and issued a $115.00 target price on shares of Microsoft in a research note on Friday, June 1st.
  • Finally, Nomura set a $108.00 target price on Microsoft and gave the stock a “buy” rating in a research note on Friday, May 4th.

One equities research analyst has rated the stock with a sell rating, five have given a hold rating, thirty-one have issued a buy rating and one has issued a strong buy rating to the company. Microsoft presently has an average rating of Buy and an average target price of $109.66.

Insider news……

Director Sandra E. Peterson acquired 5,400 shares of the firm’s stock in a transaction on Tuesday, June 5th. The stock was acquired at an average price of $101.96 per share, for a total transaction of $550,584.00. Following the completion of the acquisition, the director now owns 5,400 shares in the company, valued at $550,584.

Summary

MSFT has a market capitalization of $770.06 billion, a PE ratio of 29.92, a price-to-earnings-growth ratio of 2.10 and a beta of 1.04. The company has a debt-to-equity ratio of 1.00, a current ratio of 3.40 and a quick ratio of 3.35. Microsoft has a twelve month low of $68.12 and a twelve month high of $102.69.






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