Snowflake Stock Climbs Off Lows Ahead Of Earnings; Retailers FIVE, ULTA, DG Also Set To Report

It might be the week after Thanksgiving, but several high-profile technology stocks are on the earnings calendar, including Snowflake (SNOW). Snowflake stock is more than 60% off its high despite booming revenue growth and a big annual earnings estimate for fiscal 2024.

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Snowflake is tracked in the enterprise software group, along with other hard-hit stocks like Salesforce (CRM), Splunk (SPLK) and Workday (WDAY), which are also set to report in the coming week.

CRM stock also has struggled amid slowing revenue growth. Salesforce, a Dow Jones component, gapped down after the company’s Aug. 24 earnings report showed better-than-expected earnings and revenue. But CRM lowered its full-year earnings and revenue guidance. Buyers lifted Salesforce off lows as the stock pared an 8% intraday loss to 3.4%.

Its quarterly revenue increased 22% to $7.7 billion. Service subscription and support revenue increased 14% to $1.83 billion. The company’s Platform and Other category, which includes Slack, delivered revenue of $1.48 billion, up 53% year over year. Last year, Salesforce closed its $27.7 billion acquisition of Slack.

Salesforce also approved a $10 billion share buyback program.

Results are due Wednesday after the close. The Zacks consensus estimate is for adjusted profit of $1.21 a share, down 5% year over year. Revenue is expected to rise 14% to $7.81 billion.

Snowflake Stock Tries to Bottom

Snowflake sells data analytics and management tools that run on cloud-computing platforms like Amazon Web Services.

SNOW stock hasn’t been getting much respect from Wall Street despite several quarters in a row of strong revenue growth. For its fiscal second quarter reported in August, revenue jumped 83% to $497.3 million. That was about $30 million above the consensus estimate. Product revenue also surged 83% to $466.3 million, also above views for $439 million.

Snowflake ended the quarter with $5 billion in cash. The company’s core vertical markets are financial services, advertising, media and entertainment, retail and health care. Financial services was a big growth driver in Q2 compared to Q1.

For its current fiscal year ending in January, Snowflake is expected to turn its first annual profit of 16 cents a share. Growth is expected to ramp higher in 2024, up 156% to 41 cents a share.

SNOW also reports earnings late Wednesday. Its expected to report adjusted profit of 3 cents a share, with revenue up 60% to $535.8 million.

Outside of the enterprise software group, Pure Storage (PSTG) also reports Wednesday after the close. The fast-growing provider of flash-based storage systems is forming a cup-with-handle base with a 32.07 entry. It tried a couple of times to clear the buy point, but the stock has fallen back to its 21-day exponential moving average.

In the security software group, also watch for reports from CrowdStrike (CRWD), Zscaler (ZS) and Okta (OKTA).

In the retail sector, Ulta Beauty (ULTA) is back near highs, although four straight weekly gains have come in declining volume. Nonetheless, ULTA’s relative strength line is near highs, with results due late Thursday.

Dollar General (DG) is also near highs ahead of its report Thursday before the open. Five Below (FIVE) also moved nicely off lows after a breakout from a bottoming base.

Options Trading Strategy

A basic options trading strategy around earnings — using call options — allows you to buy a stock at a predetermined price without taking a lot of risk. Here’s how the options trading strategy works and what a recent Home Depot option trade looked like.

First, identify top-rated stocks with a bullish chart. Some might be setting up in sound early-stage bases. Others might have already broken out and are getting support at their 10-week moving average for the first time. And a few might be trading tightly near highs and refusing to give up much ground. Avoid extended stocks that are too far past proper entry points.

Snowflake stock could be a candidate for a call-option trade, especially for traders thinking that SNOW has made it through the worst of it, with a lot of bad news already priced into the stock.

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In options trading, a call option is a bullish bet on a stock. Put options are bearish bets. One call option contract gives the holder the right to buy 100 shares of a stock at a specified price, known as the strike price.

Put options are for weak performers with bearish charts. The only difference is that an out-of-the-money strike price is just below the underlying stock price. A put option gives the holder the right to sell 100 shares of a stock at a specified price.

You earn profits when the stock falls below the strike price with a put option.

Check Strike Prices

Once you’ve identified an earnings setup for a call option, check strike prices with your online trading platform, or at cboe.com. Make sure the option is liquid, with a relatively tight spread between the bid and ask.

Look for a strike price just above the underlying stock price (out of the money) and check the premium. Ideally, the premium should not exceed 4% of the underlying stock price at the time. In some cases, an in-the-money strike price is OK as long as the premium isn’t too expensive.

Choose an expiration date that fits your risk objective but keep in mind that time is money in the options market. Near-term expiration dates will have cheaper premiums than those further out. Buying time in the options market comes at a higher cost.

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This options trading strategy lets you capitalize on a bullish earnings report without taking too much risk. Risk is equal to the cost of the option. If the stock gaps down on earnings, the most you can lose is the amount paid for the contract.

Snowflake Stock Option Trade

Here’s what a recent call option trade looked like for Snowflake.

When Snowflake stock traded around 144.25, a slightly out-of-the-money weekly call option with a 145 strike price (Dec. 9 expiration) came with a premium of around $11.50 per share per contract, or 8% of the underlying stock price at the time. It was a pricey trade but keep in mind that Snowflake tends to move a lot around earnings.

One contract gave the holder the right to buy 100 shares of Snowflake stock at 145 per share. The most that could be lost was $1,150 — the amount paid for the 100-share contract.

When taking the premium paid into account, Snowflake would have to rally past 156.50 for the trade to start making money (145 strike price plus $11.50 premium per contract).

An option trade for Salesforce was less pricey. When shares traded around 150.75, an in-the-money call option with a 150 strike price (Dec. 9 expiration), offered a premium of $7.30, or 4.8% of the stock price at the time.

Follow Ken Shreve on Twitter @IBD_KShreve for more stock market analysis and insight

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