A Possible Triple Digit Gain Unfolds After an Earnings Report
Trade summary: A bull call spread in Globant S.A. (NYSE: GLOB) using the March 20 $135 call option which can be bought for about $6.10 and the March 20 $140 call could be sold for about $3.90. This trade would cost $2.20 to open, or $220 since each contract covers 100 shares of stock.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $220. The maximum gain is $280 per contract. That is a potential gain of about 127% based on the amount risked in the trade.
Now, let’s look at the details.
PR Newswire provided details on the company’s earnings report.
Globant S.A. is a digitally native technology services company. The Company’s principal operating subsidiary is based in Buenos Aires, Argentina. During the year ended December 31, 2019, 75% of its revenues were generated by clients in North America, 20% in Latin America, and 5.1% in Europe.
It builds digital journeys, which consists of different software products, including mobile apps, Web apps, sensors and other software and hardware appliances that work orchestrated by a backend that uses big data and fast data to create a understanding of each consumer and how to act upon each scenario.
The Company delivers digital journeys with a comprehensive approach that includes Stay Relevant, which helps its customers stay fit for the future of their industries; Discover, which think and conceive specific digital journeys for each customer; Build, which creates each digital journey leveraging the work of its Studios, its services over platforms and its agile pods methodologies.
The company reported Non-IFRS Adjusted Diluted Earnings Per Share of $0.64 compared to $0.50 in the fourth quarter of 2018. IFRS is the international accounting standard similar to GAAP but with significant differences. This was in line with analyst’s expectations of about $0.65.
For the full year, revenues rose to $659.3 million, representing 26.2% year-over-year growth. Non-IFRS Adjusted Diluted EPS was $2.29 compared to $1.74 for the full year 2018. Analysts expected EPS of $2.27.
“2019 was another very successful year for our company. Our full year revenues for 2019 amounted to $659.3 million, representing 26.2% year-over-year growth. It is our 5th year since we are a public company with growth above 26%.
At the same time, revenues for the fourth quarter of 2019 amounted to $184.3 million, a new record for the company and an outstanding increase of 31.5% compared to the fourth quarter of 2018,” said Martín Migoya, Globant’s CEO and co-founder.
“With Gartner’s estimate of 3.9 trillion dollars to be spent on IT alone in 2020, we continue to see an enormous opportunity for growth, since we are a unique player in the field delivering digital and cognitive transformations. We have a strong focus on innovation, on building an agile culture and applying AI to everything we do,” Migoya added.
Globant completed the fourth quarter with 11,855 Globers, 11,021 of whom were technology, design and innovation professionals
Based on current market conditions, Globant is providing the following estimates for the first quarter and the full year of 2020:
- First quarter 2020 Revenues are estimated to be at least $188 million, implying at least 28.6% year-over-year growth.
- First quarter 2020 Non-IFRS Adjusted Diluted EPS is estimated to be at least $0.62 (assuming an average of 38.2 million diluted shares outstanding during the first quarter).
Guidance is in line with analysts’ expectations.
The stock was higher on the news.
The weekly chart shows a pattern similar to the one on the daily chart which is bullish. The news pushed the stock out of a short consolidation and could lead to additional gains in the next few days.
Gains after an earnings announcement are common as analysts adjust their models to account for the results.
A Specific Trade for GLOB
For GLOB, the March 20 options allow a trader to gain exposure to the stock. This trade will be open for about six weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.
A March 20 $135 call option can be bought for about $6.10 and the March 20 $140 call could be sold for about $3.90. This trade would cost $2.20 to open, or $220 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $220.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in GLOB the maximum gain is $2.80 ($140- $135= $5; $5 – $2.20= $2.80). This represents $280 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $220 to open this trade.
That is a potential gain of about 127% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.
A Trade for Short Term Bulls
As with the ownership of any stock, buying GLOB could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.