How options traders are setting up for the major tech earnings this week

Published Mon, Oct 23 202310:30 AM EDT

Bellwether as defined by the Cambridge Dictionary as "a particular event, result, etc. that usually shows how a more general situation will develop or change." As investors we often look to earnings results, particularly management comments and guidance, to help us better understand the state of the economy. Of course it is not just the earnings results or forward looking statements management might release themselves that matter, but also how investors respond to that information. Good results may be interpreted by investors as not good enough, such was the case with Intuitive Surgical, which reported this past week, growing Q3 revenues YoY by nearly 12% and EPS by more than 21%. These numbers look pretty good versus the S & P 500 overall which has seen EPS flat to declining mid '22, but the Street was looking for 13.5% YoY revenue growth, so the stock fell. Good wasn't good enough. ISRG is a high-beta, high multiple name, an area of the market of the market that can be unforgiving if a company fails to live up to the high expectations investors set. At one point after hours the stock price fell below $250 giving us quite a scare, but fortunately it recovered 7% Friday to finish the week down just 2.28% over the prior week close. We experienced the opposite scenario in financials, where bad news was interpreted as better than expected…at least at first. During their earnings calls JPMorgan Chase, Citigroup and Bank of America forecast rising unemployment to 5% or more. While I didn't catch unemployment comments directly from Wells Fargo, they did highlight their own internal "headcount" reductions, behavior inconsistent with economic optimism. Yet, overall financials did very well on a relative basis through midday Tuesday. From October 10th through October 17th financials outperformed the S & P 500 overall by nearly 1 percentage point. The sector has since given back all that outperformance dropping by 5% from midday October 17th through Friday's close. Those keeping track at home may remember we owned BlackRock, Goldman and Bank of America going into earnings. We unwound those positions last Wednesday and Thursday — earlier than normal. Equity markets do not offer "freebies". One generally doesn't find growing, well capitalized, well managed companies trading at a discount to broad-market multiples. Of those four attributes an investor may find 2 or 3 if they're lucky. That ISRG with disappointing revenues outperformed financials which had already been badly punished, suggests to me investors are unwilling to go out on the macro-economic limb, and still prefer idiosyncratic (growth) risk. Big Tech earnings This week is less about reading between the lines/through results, and contextualizing management comments, but rather it's about the market itself. Well over 40% of the S & P 500 by market capitalization reports earnings over the next 5 days. The 10 largest companies reporting this week represent over 25% of the S & P 500 by market cap. Four of the so-called "Magnificent Seven" mega-cap companies; Alphabet (GOOG, GOOGL) , Amazon (AMZN) , Meta Platforms (META) and Microsoft (MSFT) will be reporting this week. Since Tesla (TSLA) reported last week (disappointing investors largely on continued delays with the Cybertruck), after this week, only two of them will remain: Apple (AAPL), scheduled to report earnings November 2nd, and Nvidia (NVDA) whose earnings are anticipated November 21st. So what are investors focusing on, and what is the options markets anticipating? Alphabet Inc. (GOOG/GOOGL) reports Tuesday after the close. Investors are likely to focus on a few key topics. YouTube is taking the fight directly to streaming competitors with subscription offerings including YouTubeTV and Sunday Ticket. Where we used to think of YouTube simply in terms of ad revenues, their sports offerings in particular are extremely competitive products. (Our own household, which includes a HS age football fanatic), has made the switch and there's really no comparison. Think multiple game simulcast/sportsbar offering in your living room and you get the idea. Google Pixel 8 launch: The biggest and most important mobile phone launch is of course the iPhone 15, but many are wondering if Google can incorporate in-device generative AI features more quickly than their primary rival. AI - AI - AI! Alphabet/Google have long been thought of as leaders in AI, they were pushed out of their perceived leading role with the launch of OpenAI's ChatGPT. This is quite important because ChatGPT has been viewed as a threat to search. Investors will surely be eager to hear what's on the horizon, particularly after Alphabet's earlier-than-scheduled chatbot launch awhile back stumbled publicly. Cloud: a key business for Alphabet which is chasing market leaders Amazon (AWS) and Microsoft (Azure), and a business line where many expect even faster growth resulting from incremental compute/processing demand as a result of, you guessed it, AI. Search: ChatGPT caused an immediate boost to Google search competitor Bing, but that shift may have slowed. The options market is implying an earnings related move of 4.7%. Our options market sentiment score for GOOG/GOOGL is 80th percentile - which one may think of like a score/grade, so a B- in terms of options sentiment. In terms of valuation/fundamentals I like GOOG/GOOGL longer-term with its strong balance sheet, great businesses, and a reasonable valuation. I generally don't favor selling options into catalysts such as earnings unless their prices are well above average, and GOOG/GOOGL options aren't overpriced here given the company is due to report earnings shortly. An example of a way to play GOOGL for an upside move in the weeks following earnings with defined risk would be a debit call spread such as the November 140/150 calls spread shown here. Microsoft also reports Tuesday October 24th post-close. Here's what investors will likely focus on. Gaming/ATVI: Microsoft closed the Activision deal on Friday the 13th. Net of the merger one might anticipate a modest drag on margins, but this was key to Microsoft's subscription-gaming plans. Microsoft has been leading efforts to integrate AI chats/bots/help/support across their products, perhaps most notably in Office. Will Azure gain on AWS in "Hybrid-Cloud" Hybrid-cloud as the name suggests, combines on-premises and public cloud. The options market is implying an earnings-related move of 4%. Our options sentiment score is 87th percentile or a B to B+ by our work. It has a strong balance sheet and solid revenue, income and free cash flow growth projections of 12-14.5% or so. At 30 times forward earnings expectations it isn't a bargain though. As is the case with Alphabet (GOOG/GOOGL) Microsoft earnings are not unreasonably priced so I would not favor a short-premium trade here. A similar structure to the earlier example, but with a slightly longer time to expiration is presented here… Amazon reports earnings Thursday, October 26th, after the close. Investors will be focusing on AWS: As with competitors Microsoft and Alphabet/Google, investors are looking for stabilization/rebound in cloud sales growth in constant-currency terms. This may also be thought of as a sentiment indicator as one might expect business spending to slow if managers are pessimistic. Although it's just a number, it is a big one. Investors have long forecast that Amazon would one day top $1 trillion USD in gross merchandise volume (GMV), a number that may once have seemed far-fetched may finally be within the foreseeable future. Some expect Amazon to reach this milestone in 2026. Logistics: Amazon is increasingly a logistics company, albeit asset-light relative to transportation and logistics businesses like Federal Express whose businesses have also seen a secular tailwind largely provided by Amazon. Improving logistics is likely key to improving margins, but to me is also a linchpin in the company's role in online transactions whether from their stores or distribution centers, with their own trucks or not including payments. Done correctly Amazon, could touch a very high percentage of all sales transactions. That may be a scary prospect to some as well. Grocery - This gets mentioned a lot, but I mention it only in passing because in the scale of their overall business this is quite small. Moreover I believe the work they are doing in other areas, most notably logistics, consumer services such as Alexa and AI integration, will ultimately allow them to grow this business considerably, if they choose to. In terms of overall valuation, grocery is a relatively low-margin business generally that doesn't trade at a great turn anyway, so interesting, but not critical. The options market is implying a 6.3% earnings-related move. While this may seem big, and it is, it is not out of the ordinary. AMZN popped 8.3% after the most recent earnings report and has seen 3 double digit percentage moves over the past 8 reported quarters. Call open interest is 15% higher than put open interest, our options market sentiment score is 83% so B/B- territory. Amazon has over $60 billion in cash available, and net debt of $90 billion. At 40 times FY earnings estimates, it isn't a cheap stock - although that's a knock on the company that one could have made for the past 10 years a period during which AMZN has outperformed the total return of the S & P 500 by more than 460%. I highlighted a put spread on CNBC this past week, which was an example of some of the recent options flows we've seen which could be used as a hedging strategy if one is long the stock but concerned about the substantial implied move. One could use the following strategy either as a hedge against a long stock position or, if one were so inclined to make a bearish bet without the undefined risk of a short stock position, one could use the following put spread. Meta Platforms reports earnings Wednesday, October 25th after the close. Investors will be focusing on The metaverse: This huge swoon the company experienced was largely the result of investor disenchantment with the massive investments the company was making to pursue Mark Zuckerberg's metaverse visions that seemed somewhat ephemeral and in any case were chewing up the bulk of the company's FCF. Chastened the company reversed course somewhat, and the stock rebounded, but questions will surely remain about "what metaverse?" and "what now". Ad revenues: Instagram/Reels/WhatsApp/Threads. X (formerly Twitter) changed their algorithms prioritizing paid subscriber content. The switch encouraged some content creators to look for other platforms which could boost Meta's platforms. Free cash flow: Kind of a catch-all barometer for the balance that management strategy (presumably Zuckerberg himself most notably) is trying to strike between ambitious plans and maximizing returns on current businesses. The options market is implying a nearly 8.4% earnings related implied move, nearly double the move when the company reported last July, but that was modest relatively. The past 8 quarters have seen 5 double digit moves following earnings. Our options market sentiment percentile is 12.5%. This is a very low score, but I should point out that this score ranks the return over risk, and right now the huge moves implied by the options market suggest that risk is very high, thus causing the score to deteriorate. Fundamentally the company is strong, with greater than $50 billion in cash on hand and total net cash of $20 billion which I expect will have improved on greater than $7 billion in anticipated free cash flow over the quarter they will be reporting. At perhaps 22 times full-year earnings may look only reasonably valued when compared to the S & P in a vacuum, but if Meta remains on track to deliver greater than 25% YoY EPS growth for 2024 it's a bargain compared to the S & P 500. Here the dilemma is that short-dated options premia are quite elevated, but then they also deserve to be given some of the sharp-moves recent earnings results have propelled. I would rather be long, longer-dated options and sell shorter-dated premium against it. One strategy example that comes to mind is a diagonal call spread. Purchasing a longer-dated, lower-strike call financed in part by selling a nearer-dated higher strike call, such as this example: I will normally provide a table of companies reporting earnings, but these companies represent such a significant portion of the overall value of publicly traded companies, and such a disproportionate share of options volume in notional terms, that it's quite hard to focus on anything else. However if one's interested. integrated oil companies ExxonMobil and Chevron are due to report this week, both on the 27th, with modest implied moves of just over 2% and Visa and Mastercard will be reporting on the 24th and 26th respectively with implied moves of just over 3%. Rounding out the big names (mega-cap, over $250B are Merck & Co and AbbVie reporting on the 26th and 27th respectively, but also anticipating relatively modest moves of just over 3%. Have a great week, and we'll provide some updates late Wednesday. DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.