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Bullish Earnings Create a Bullish Trading Opportunity

Bullish Earnings Create a Bullish Trading Opportunity

A relatively small but fast-growing software company recently announced earnings. GlobeNewswire reported that Mimecast Limited (Nasdaq: MIME), a leading email and data security company, delivered financial results for the second quarter ended September 30, 2019.

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  • Traders seemed to like the news.

    MIME daily chart

    The report noted,

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    “Email Security 3.0 furthers our defenses beyond the perimeter, addressing pervasive threats to protect customer’s brands and reputations while simplifying IT,” stated Peter Bauer, CEO of Mimecast.

    Mimecast’s CFO, Rafe Brown, commented, “For the first time we surpassed $100 million in quarterly revenue.  A tremendous achievement on the back of solid execution that led us to exceed the high end of our guidance for both revenue and adjusted EBITDA.”

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  • Second Quarter 2020 Financial Highlights

    Revenue: Revenue for the second quarter of 2020 was $103.4 million, an increase of 26% compared to $82.2 million of revenue in the second quarter of 2019. Revenue on a constant currency basis increased 29% compared to the second quarter of 2019.

    Customers: Added 800 net new customers in the second quarter of 2020, and now serve 36,100 organizations globally.

    Revenue Retention Rate: Revenue retention rate was 110% in the second quarter of 2020 consistent with the second quarter of 2019.

    Gross Profit Percentage: Gross profit percentage was 75% in the second quarter of 2020, compared to 73% in the second quarter of 2019.

    Non-GAAP Gross Profit Percentage: Non-GAAP gross profit percentage was 76% in the second quarter of 2020, compared to 74% in the second quarter of 2019.

    Net Loss: Net loss was $0.9 million, or $(0.01) per diluted share, based on 61.8 million diluted shares outstanding, compared to a net loss of $2.1 million, or $(0.03) per diluted share, based on 59.8 million diluted shares outstanding in the second quarter of 2019.

    Non-GAAP Net Income: Non-GAAP net income was $8.5 million, or $0.13 per diluted share, based on 63.9 million diluted shares outstanding, compared to a non-GAAP net income of $3.6 million or $0.06 per diluted share, based on 62.8 million diluted shares outstanding in the second quarter of 2019.

    Adjusted EBITDA: Adjusted EBITDA was $20.0 million, representing an Adjusted EBITDA margin of 19.3%, up from 15.0% in the second quarter of 2019.

    Operating Cash Flow: Operating cash flow was $17.7 million in the second quarter of 2020, compared to $12.5 million in the second quarter of 2019.

    Free Cash Flow, Cash and Investments: Free cash flow was $4.0 million in the second quarter of 2020, compared to $4.2 million in the second quarter of 2019. Cash and short-term investments as of September 30, 2019 were $199.2 million.”

    These bullish numbers all come as the stock appears to be searching for a bottom.

    MIME weekly chart

    A Trade for Short Term Bulls

    As with the ownership of any stock, buying MIME 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.

    bull call spread

    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.

    A Specific Trade for MIME

    Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.

    When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.

    For MIME, the December 20 options allow a trader to gain exposure to the stock.

    A December 20 $40 call option can be bought for about $3.60 and the December 20 $45 call could be sold for about $1.50. This trade would cost $2.10 to open, or $210 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 $210.

    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 MIME the maximum gain is $2.90 ($45 – $40= $5; $5 – $2.10 = $2.90). This represents $290 per contract since each contract covers 100 shares.

    Most brokers will require minimum trading capital equal to the risk on the trade, or $210 to open this trade.

    That is a potential gain of about 38% in MIME, based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.

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