Investors usually see one way to get exposure to a stock and the direction in which they expect this stock to move in the future: to buy shares of the stock itself ahead of an event. However, there is another way to get exposed to a company's underlying directional move, which can give investors a certain level of leverage for a big payoff if they’re right.
This is done through stock options, but they have a couple of caveats, such as timing and risk. Investors need to get the direction of the stock right and the specific timing of that move, considering stock options contracts have an expiration date. These two caveats significantly raise the stakes for traders buying these instruments.
Knowing this, Spotify Technology's (NYSE: SPOT) recent options volume spike can mean something for investors to consider in the coming weeks, especially as the company’s quarterly earnings report is set to come out this month as well. Some may even assume that the recent options positioning might be a way to bet ahead of earnings with a bullish view for reasons investors are about to uncover today.
Why Spotify Stock Is Attracting New Call Option Buyers
Up to four-bit call option buyers came into the market in the past month, buying a net amount of $198,826 worth of contracts. This is only the amount of money put into the trade; now, investors need to account for the leverage inherent in the options contracts, which amplifies the weight these trades have for the future of Spotify stock.
This model involves subscriptions for reliable and predictable cash flows (equal safety) and low overhead costs. These two factors are often found in the technology sector, where Spotify lives and operates, having both the low costs and subscription model.
As investors like Stanley Druckenmiller express concerns about sustained high inflation in the coming years, markets worry that discretionary items like subscriptions might start to suffer. However, not all subscriptions are made equal, as services like entertainment are typically never canceled, hence why Netflix Inc. (NASDAQ: NFLX) is up by 11% a day after earnings.
Knowing that Spotify shares the same demand predictability and cash flow stability, investors might want to start betting ahead of time before the company reports its new quarter. These traders are not alone in this view, though. Some on Wall Street have joined the trend to show investors how much momentum potential there is today.
Wall Street's Outlook on Spotify Stock
Even though the stock trades at 95% of its 52-week high level, Wall Street analysts still expect it to trade at new highs in the coming months, perhaps with new earnings being the catalyst to move the stock toward these new targets.
Starting with analysts at Pivotal Research, who recently reiterated their "Buy" rating for Spotify stock, investors can do the math for their new price target of $510 a share. This target calls for a net upside of 33.7% from where the stock trades today, not to mention a new all-time high.
Then there are those at Keycorp calling for a similar $490 price target for Spotify stock, making the new trend clearer for investors to consider moving forward, especially as new traders come into the stock ahead of earnings, building the evidence needed to mix for a potential beat.
These bullish outlooks for Spotify stock aren't that out of touch with reality, as other institutional buyers have come to reiterate the company's new bullish potential. Those at Perpetual Ltd recently boosted their holdings in Spotify stock by 24.3% to net their holdings at up to $279.8 million today.
Then, there are broader markets, sending a clear message to investors. Compared to the business sector's average price-to-earnings (P/E) valuation of 42.6x today, Spotify stock calls for a significant premium of 149.7x P/E today, and that's one factor investors need to lean on.
Remembering that this business model offers not only inflation-beating growth but also stability and predictability, investors should not be surprised to see markets willing to overpay for exposure to this stock. The trend is extended to the stock's price-to-book (P/B) ratio of 26.5x today, compared to the industry's average P/B of 4.8x.
Netflix beat analyst predictions on revenue with $9.83 billion for the third quarter, up 15% year-over-year. Net income of $2.36 billion and EPS of $5.40 per share also topped expectations and were up significantly from $1.68 billion and $3.73 for net income and EPS, respectively, last year at this time. Helping to drive both top- and bottom-line growth was a 14% year-over-year increase in total active subscribers, bringing the streaming giant to nearly 283 million. This pace of growth slowed slightly compared to recent quarters. Still, analysts expect shares to continue to rise.
Notably, investors will have to gauge Netflix's performance based only on its financials very soon, as the company has just one more quarter of subscriber data to share publicly. Beginning in 2025 the firm has said it will stop reporting subscriber numbers.
TSM Spikes on Strong Earnings and Outlook
Taiwan Semiconductor Manufacturing, the second-largest semiconductor manufacturer in the world based on market capitalization, reported significant growth in both revenue and income for the third quarter. Revenue jumped by 39% to about $23.6 billion, while net income soared 54% year-over-year to about $10.1 billion after currency conversion. Both of these figures topped analyst expectations.
TSM attributed the performance to a spike in demand for hardware related to AI applications, and the firm expects this trend to continue through the end of the year. Shares of TSM stock rose by about 9% immediately following the earnings report and have since shifted slightly downward from that level.
ASML Disappoints With Early Results
Dutch semiconductor maker ASML, unlike TSMC, fell short of analyst predictions in some areas. Net sales of €7.5 billion (approximately $8.1 billion) were a bright spot, as they exceeded expectations. However, net bookings of €2.6 billion (around $2.81 billion) were less than half of what analysts had forecast.
ASML executives cautioned that a recovery in the semiconductor space would be slower than expected, issuing a new net sales outlook for 2025 between €30 billion and €35 billion (roughly $32.4 billion to $37.8 billion). This forecast lands at the lower end of the company’s previous estimates and falls short of analysts' expectations for the coming year.
Another surprise was the release of ASML's earnings, which happened a day ahead of schedule due to a technical error. ASML shares have dropped by more than 15% in the last five days, primarily due to the earnings results and guidance.
AXP, JPM, WFC, and Other Financial Companies Post Largely Positive Results
American Express topped profit expectations with net income of $2.5 billion or $3.49 per share. It narrowly missed on revenue but beat forecasts for net interest income. On top of that, the credit card and services company boosted its full-year EPS guidance to a range of $13.75 to $14.05 when it was previously $13.30 to $13.80.
Big banks, including JPMorgan Chase & Co. (NYSE: JPM) and Wells Fargo & Co. (NYSE: WFC), also posted quarterly results this week. Most of the reports were positive, with these and several other banks topping predicted earnings levels. However, while JPMorgan saw net interest income rise by 3% year-over-year, Wells Fargo's dropped by almost 11%. Higher spending rates to maintain deposits have hurt net interest margins, although the results reported this week do not reflect the full impact of the Federal Reserve's September rate cut. Several banks also significantly increased the funds set aside to cover potential credit losses. A bright spot for many banks was investment banking and wealth management revenue, driven by the prolonged rally in U.S. markets.
Cisco builds and sells a range of Internet Protocol-based networking tools and services. Its clients include businesses of all sizes, governments, educational institutions, and even service providers. Now, though, much of Cisco's focus is on cloud computing solutions, AI infrastructure, security, and related endeavors.
At this point, AI makes up just roughly 2% of Cisco's revenues, as the strength of the firm's legacy business remains solid. And yet, several analyst upgrades for Cisco stock have inspired investors in recent weeks to refocus on the tech firm, sending shares upwards by more than 12% in the last month as a result. Investors considering Cisco's potential in the emerging AI infrastructure landscape are advised to consider how the company is already working to capture a total addressable market estimated to reach more than $421 billion by 2033.
Upgrade From Citigroup, Buy Ratings From Other Analysts
Citigroup Inc. (NYSE: C) analyst Atif Malik upgraded Cisco on October 16, 2024. Malik moved the tech firm from Neutral to Buy, raising the price target by $10 to $62 per share in the process. This has followed after reiterations of buy ratings from analysts at Morgan Stanley (NYSE: MS), Evercore, and Tigress Financial Partners in recent weeks. In response to the Citi upgrade, Cisco shares popped upward by about 5% throughout the day on October 16.
For Malik, Cisco has significant potential in the burgeoning field of ethernet-based AI. Cisco's pre-existing ethernet switches, which have been used previously to facilitate traditional computer networks, could also help to connect graphics processing units used in AI applications to other hardware. Malik views a potential rotation away from semiconductors and toward AI networking services as another likely benefit for Cisco.
Business Changes and Solid Fundamentals
A key business change that Cisco has recently enacted that could contribute to long-term top-line growth is the use of a subscription model for its networking solutions. Given Cisco products' high degree of integration in customer tech ecosystems, the move to a subscription fee model will not likely cost the company many customers. It will likely have the sizable benefit of generating recurring revenue.
Besides this, many of Cisco's core fundamentals are strong. With a forward P/E ratio of 19.5, Cisco shares are undervalued compared with many of its competitors. The company's gross margin for the most recent quarter was 64.4%, and its fiscal 2024 gross margin was a 20-year high of 64.7%.
Cisco's cash flow decreased from the final quarter of its fiscal 2023 to the latest quarter, but it remained a healthy $3.7 billion. This provides Cisco ample room to continue a strategic pivot toward AI applications.
Value and Dividend Appeal
The combination of Cisco's compelling P/E ratio and strong cash flows means it is a good choice of dividend stock for investors who are optimistic about the firm's long-term prospects.
Cisco's annualized three-year dividend growth is 2.72%, its dividend yield is an attractive 2.82%, and its dividend payout ratio is sustainable at 53.87%.
By contrast, rival Juniper Networks has a dividend yield of 2.24% and a dividend payout ratio of 127.54%, suggesting that it may not have the resources to continue to pay dividends at the current rate without an underlying shift.
This further highlights Cisco's financial stability and strategic positioning, making it a potentially safer bet for dividend-focused investors in the technology sector. Additionally, Cisco's ability to maintain consistent cash flows through market fluctuations bodes well for long-term sustainability.
Case For Long-Term Approach
Cisco shares have risen by 5.6% in the last year and are currently trading at a one-year high, though they remain below levels achieved at the end of 2021. Its general resilience in the face of supply chain issues and the semiconductor shortage in recent years is evidence of its stability throughout different market conditions. As AI continues to boom—and particularly as the technology expands into the realm of ethernet connectivity—few companies are better prepared than Cisco to rise to the occasion.
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