As many technology companies are facing tough quarterly comps (as the initial pandemic social-distancing bump wears off), the market is misinterpreting (in some cases) the latest batch of earnings results with a short-term lens. And this has created some attractive opportunities in the options market. In this report, we review a high-income-generating options trade on a powerful social media stock that just recently sold-off. The trade not only puts significant upfront premium income in your pocket (that you get to keep no matter what), but it also gives you a shot at picking up shares of this extremely attractive company at an even lower price. We believe this is an attractive trade to place today and potentially into early next week, as long as the underlying share price doesn’t move too dramatically before then.
Pinterest (PINS)
Pinterest is a very attractive social media image-sharing service that allows people to save and discover information. And the company is growing rapidly thanks to its large/growing user base and the extremely high success rate of its targeted ads revenue versus other social media platforms.
Shares of PINS sold off very hard two weeks ago following a quarterly earnings release that disappointed some investors. However, a closer look at the company (and the numbers) reveals a powerful business strategy that is growing rapidly and trading at a very reasonable price.
Pinterest Share Price
For perspective, the following table shows a few of Pinterest’s attractive growth and valuation metrices.
Revenues are expected to grow at +32% over the next year, which is a very high (attractive) number in its own right, but when you factor in the 16.5x price-to-sales metric, the current share price becomes even more attractive.
And what is particularly special about Pinterest is the high effectiveness of its targeted ads versus other social media platforms like Facebook and Google. The Pinterest user base is particularly engaged leading to increase efficacy of advertisements (the ads are highly targeted based on the information Pinterest is able to gather about its users).
The Trade:
Sell Put Options on PINS with a strike price of $50 (~12% out of the money, it currently trades at ~$56.85), and an expiration date of September 17, 2021, and for a premium of at least $0.77 (or $77 because options contracts trade in lots of 100). This comes out to approximately 1.54% of extra income in just over 1-month—which may not sound like a big return—but it is significant for such a short time frame (it’s approximately 18.5% of extra income on an annualized basis, roughly calculated as ($0.77/$50) x 12 months). And this trade not only generates attractive upfront premium income for us now, but it gives us a chance at buying shares of this attractive long-term social media stock at a significantly lower price ($50—the strike price) if the market price falls below $50 and the shares get put to us before this option contract expires in about 1 month. And we get to keep the upfront premium income no matter what.
Also important to note, you can adjust the strike price of this trade (for example to $47 or $55) depending on how badly (and at what price) you want the shares put to you, and to generate a different amount upfront income as shown in the table above).
Your Opportunity:
We believe this is an attractive trade to place today, and potentially into early next week, as long as the price of PINS doesn't move too dramatically before then and you’re able to generate enough premium income to your liking.
Our Thesis:
Our thesis is basically that PINS is a very attractive, high growth, social media stock with a lot or room to continue to grow rapidly. The market over reacted (to the downside) to the company’s recent earnings announcement (PINS face tough pandemic comps), but the compelling long-term growth story is still intact (i.e. PINS will keep growing and monetizing its very happy user base).
For perspective, here is a look at the quarterly revenue growth slowdown in recent quarters that has resulted from people spending less time online as pandemic lockdowns ease. Important to note, the company is still growing rapidly, it has a large TAM to keep growing rapidly
Next, here is a look at the drop off in monthly active users (again a result of lockdown easing.
However, revenue per user (generated from advertising dollars) has remained very strong as the platform remains highly effective.
Pinterest has a long runway for continuing growth.
Important Trade Considerations:
Two important considerations when selling put options are ex-dividend dates and earnings announcements because they can both impact your trade. However, neither is a factor for PINS because it does not pay a dividend and it will not announce earnings again until well after this contract expires. Had either of these events been scheduled to happen before this option contract expires then we’d have to receive a higher level of upfront premium income to adjust for those risks.
Conclusion:
Pinterest is an attractive business trading at an attractive price. Importantly, this is not a dividend stock, but it can still provide income in two ways. First, the options trade described in this report generates attractive upfront premium income that you get to keep no matter what. And second, if the share price falls below the strike price and the shares get put to you before this contact expires then you will have picked up a position in a very attractive company at a very attractive price. And over time, as the share price grows, so too will your ability to generate income from taking profits (plus, it’s a good idea to hold a few attractive non-dividend stocks in your portfolio for diversification and risk-reductions reasons).
Worth noting, because the share price has been volatile (following earnings), the upfront premium income available in the options market is higher (when uncertainty, volatility and short-term fear rise, so does premium income).
Importantly, market prices are moving constantly, and you’ll likely have to “work this trade” a little if you enter it (i.e. you likely won’t get the exact same premium as described in this report). However, if you are an income-focused investor, we believe this is an attractive trade to place today and potentially into early next week.