As I write this early in Friday trading, investors await Federal Reserve chairman Jerome Powell's speech today from Jackson Hole, Wyoming. The markets want to know what’s happening with interest rates. Anything Powell says to indicate rate hikes will be paused should be good news for stocks.
The markets expect the Fed to raise rates by 25 basis points when it meets in November rather than September.
In the meantime, Fridays for me mean talking about unusual options activity. The call option with the highest volume to open interest is Sea (SE), with a Vol/OI ratio of 31.14x.
In addition to Sea, two other call options exhibiting unusual options activity in Friday morning trading have caught my attention.
Have an excellent weekend!
Digitalocean Holdings
How can you go wrong with a name like Digitalocean Holdings (DOCN)?
I don't know a whole lot about this company. Quickly looking at its 2023 stock chart tells me the SMID cap stock is very volatile. I wouldn’t recommend risk-averse investors get on board this train.
However, the cloud infrastructure provider could be a long-term winner if you don’t mind the risk in your stock selection. But first, it has to get through an accounting snafu that will see it restate its earnings for Q1 2023 and back into 2022. The restatement for the first quarter, which had to do with overstating income tax expenses, will reduce its net loss.
The part that’s caused a 44% drop in its share price over the past month is that it had to cut its revenue guidance for 2023 to between $680 million and $685 million. That’s down from its previous revenue estimate of at least $700 million.
As I said, I don’t know Digitalocean very well, but my initial observation is that the 44% drop was way overdone. And that’s considering that CEO Yancey Spruill is stepping down after four years in the top job. Spruill took the company public in March 2021. He will stay on until a successor is found.
On an adjusted EBITDA basis, the company’s revised guidance calls for $258 million in 2023, with positive adjusted free cash flow. That’s a positive in my book.
Anyway, the Sept. 15 $30 call is seeing unusual activity today. Its volume is 15.37x open interest with an ask price of $0.70. It’s got 21 days to gain 11.4% to exercise your right to buy DOCN shares at $30. Given the volatility, it’s possible. Further, you’ll double your money on the ask premium if its share price rises by $2.51 over the next three weeks.
Affirm
After yesterday's close, Affirm (AFRM) reported Q4 2023 results that were off-the-charts good. AFRM stock is up 28% today on the news.
The buy now, pay (BNPL) later fintech grew revenue by 22% in the fourth quarter, its gross merchandise volume (GMV) was up 25% year-over-year, and it finished its fiscal year with 254,000 merchants using its BNPL services, 8% higher than a year ago.
Meanwhile, consumers continue to embrace BNPL. It finished the year with 16.5 million active consumers, up 18% from last year. The number of transactions per active consumer grew by 30% YOY.
It wanted to become profitable on an adjusted operating income basis in 2023. It met this goal by generating an adjusted operating profit of $14.7 million in the fourth quarter. Onward and upward from here.
Skeptics will point to Affirm’s nearly $1 billion net loss in 2023, up almost $300 million from 2022, as a reason to stay away from its stock. Today’s trading suggests investors see things differently.
The reality is that consumer engagement continues to gain traction. As economies worsen, BNPL services will likely accelerate rather than decelerate. That’s the kind of business I want to own in a recession.
In fiscal 2024 (June year-end), Affirm expects GMV of $24 billion, revenue of $1.9 billion, 20% higher than in 2023. More importantly, it expects to generate an adjusted operating profit for the entire year, translating into a 2% adjusted operating margin, 660 basis points from a negative margin in 2023.
I always felt BNPL services would become mainstream. Technology has allowed merchants to provide layaway services without physically putting them aside. If used responsibly, it’s a win/win for consumers and companies like Affirm.
As for Friday’s unusual call options activity for Affirm, there is a boatload of possibilities.
Two have Vol/OI ratios of 10x or higher. Both expire next Friday. One has a $17.50 strike. The other is $21. As I write this, the former has an ask price of $0.96, while the latter’s is $0.12.
While the ask price on the $21 strike is just 0.7% of the current share price ($17.69), I’m not sure a $3.43 increase over the next seven days is in the cards, especially given today’s big jump.
On the other hand, the $17.50 strike requires just a 77-cent increase over the next week to be in the money. That makes far more sense.
In the long term, I see AFRM returning to the $30s with improved profitability.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
