Earnings From Bill.com Sets Up a Possible Gain of 127%
Trade summary: A bull call spread in Bill.com Holdings, Inc. (NYSE: BILL) using the November $105 call option which can be bought for about $3.60 and the November $110 call could be sold for about $5.80. 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.
Business Wire reported that BLL, “a leading provider of cloud-based software that simplifies, digitizes, and automates complex back-office financial operations for small and midsize businesses (SMBs), [recently] announced financial results for the first fiscal quarter ended September 30, 2020.
“We kicked off the new fiscal year with strong Q1 financial results that exceeded our expectations, as we saw SMB customers getting back to business compared to the prior quarter,” said René Lacerte, Bill.com CEO.
“We experienced strong demand for our platform as customers embraced our broader offering of payment methods. We are excited about the increasing adoption of our platform throughout our diversified go-to-market ecosystem,” concluded Mr. Lacerte.
Financial Highlights for the First Quarter of Fiscal 2021
Total revenue was $46.2 million, an increase of 31% from the first quarter of fiscal 2020. Subscription and transaction revenue was $43.8 million, an increase of 53% from the first quarter of fiscal 2020.
GAAP gross profit was $34.1 million, representing a 73.8% gross margin, compared to $26.0 million, or a 74.0% gross margin, in the first quarter of fiscal 2020. Non-GAAP gross profit was $35.6 million, representing a 77.0% non-GAAP gross margin, compared to $27.2 million, or a 77.2% non-GAAP gross margin in the first quarter of fiscal 2020.
Loss from operations was $13.8 million, compared to a loss from operations of $6.3 million in the first quarter of fiscal 2020. Non-GAAP loss from operations was $3.7 million, compared to a non-GAAP loss from operations of $3.5 million in the first quarter of fiscal 2020.
Net loss was $13.0 million, or ($0.16) per share, basic and diluted, compared to net loss of $5.7 million, or ($0.69) per share, basic and diluted, in the first quarter of fiscal 2020. Non-GAAP net loss was $2.8 million, or ($0.04) per share, basic and diluted, compared to non-GAAP net loss of $2.8 million, or ($0.05) per share, basic and diluted, in the first quarter of fiscal 2020.
Cash, cash equivalents and short-term investments were $700.3 million at September 30, 2020.”
Ten analysts for Bill.com Holdings are forecasting revenues of US$193.1m in 2021. If forecasts are correct, this would mean a 15% improvement in sales compared to the previous 12 months for the company. These analysts are bullish and BILL seems to be attempting to establish support on the daily chart.
The weekly chart shows a persistent up trend since shares began trading earlier this year.
A Specific Trade for BILL
For BILL, the November options allow a trader to gain exposure to the stock. This trade will be open for about three weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.
A November $105 call option can be bought for about $3.60 and the November $110 call could be sold for about $5.80. 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 BILL, the maximum gain is $280 ($110- $105= $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 BILL 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 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 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.