As I checked out Barchart.com’s Top 100 Stocks to Buy for my Wednesday commentary, I noticed that one of the new entrants was way down in the 56th spot, a jump of 44 positions.
Blend Labs (BLND), a San Francisco-based provider of a cloud-based banking platform that improves a lender’s workflow, is up more than 15% as I write this. The company’s weighted alpha is 186.50, while its shares are up 108% over the past 52 weeks, suggesting that the small-cap software stock could be ready to go on another heater.
But before you break open the piggy bank, make no mistake about the simple fact that Blend is a money-losing business whose penny-stock share price screams high-end volatility and possible financial disaster.
I’m not suggesting it lacks great long-term potential; I just wouldn’t use funds meant for your kid’s education to make a bet on it.
However, I would like to explore whether there are any options worth using to make a bet. You can reduce your risk without missing out.
Here goes.
I Always Check Unusual Options Activity
As I look at Wednesday's unusual options activity -- I define it as a Vol/OI ratio of greater than 1.25, but it can be anything where the day’s volume is higher than the open interest -- I see that there’s only one call, the April 19 $5 strike.
Interestingly, there is a second call and a put with volume on the day and no open interest. The call has a $7.50 strike on March 15, while the put expires on April 19 and has a strike price of $5. So, the two calls are out of the money, while the put is very much in it.
Let’s assume we are bullish about Blend’s future. Should we buy one of the calls or sell the put?
If you’re not into risk, you definitely don’t want to mess with the put. With more than seven weeks to expiration, it could easily fall back to its May 2023 52-week low of $0.53.
If you sell one put contract, your net price should you have to buy the 100 shares would be $3.00 based on the $2 bid price. It’s currently 4 cents above that. If it goes to $0.53, you’d be out $247 per contract. However, if it somehow manages to get up to $5, you have an annualized return of 546%. Now, that’s a return.
But what are the odds? It hasn’t traded above $5 since March 2022, so the odds are low.
Now, let’s consider the two calls.
The $7.50 strike expires in nine days. It has an ask price of $0.05 and a down payment of 0.70%. Peanuts. The $5 call expires in 44 days. It has a down payment of 5% based on a 25-cent ask.
If you want to buy shares using options, a 5% down payment is not much to ask. However, the stakes have to increase in price by 73% for you to exercise your right to buy 100 shares.
While a 73% pop is possible, a 148% increase over the next nine is not. Therefore, the $5 call is the better play of the two.
Some Other Interesting Options Popping Up
As I’ve written, some attractive alternatives have popped up on Blend’s Unusual Options Activity page.
For example, if you also like income, the May 17 $2.50 put with a bid price of $0.30 looks tempting. If you sold one or more puts, the annualized return would be 50%, a more realistic yield than the 546% mentioned earlier. The downside is that there are four more weeks until expiration. It could easily fall below your price of $2.20.
Frankly, I see three Aug. 16 calls with increasing volume as the best bets. The strike prices are $2.50, $5.00, and $7.50, and the respective ask prices are $1.35, $0.60, and $0.30. That’s down payments of 54%, 12%, and 4%.
Based on a $3.06 share price, the $2.50 call must increase by 26% over the next 163 days, followed by 83% for the $5.00 strike and 155% for the $7.50.
Again, if you want to own the stock for a long-term hold, the $2.50 call makes the most sense despite the 54% down payment. In the worst-case scenario, you’re out $135.
What About the Business Itself?
There isn't any question that a business like Blend Labs is needed in the lending business. Banks, especially smaller ones, have been notoriously thrifty about investing in their technology. There are hundreds of banks with legacy systems that I’m sure need an overhaul or complete reboot.
As Blend’s website points out, it has 39 of the top 100 institutions of the Federal Reserve based on assets under management as customers. This means big banks see the need for an end-to-end platform to accelerate workflow while staying on top of things.
The New York Community Bancorp (NYCB) situation suggests that smaller banks are in need more than the bigger, more regulated banks.
Its September 2023 Investor Day presentation estimates Blend’s annual U.S. total addressable market is $5.3 billion. Globally, it’s nearly $10 billion. And if it expands into the commercial banking origination business, it will grow to $15.5 billion.
In the first nine months of 2023, its revenue was $120.7 million. With Q4 2023 guidance of $37.5 million at the midpoint of its outlook, it should generate 2023 revenue of $158 million, or 3% of its U.S. total addressable market.
Sure, it will lose approximately $80 million on that revenue in 2023, but the potential is considerable. Two of its three revenue streams are declining, so the odds of a profitable quarter in 2024 are low.
Only aggressive investors should be looking at Blend Labs. Maybe not by name, but it’s still in the venture capital mode. It really should be private.
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.
