Aggressive Investors: Zoom In on This Unusually Active Put

It’s Thursday, so it's time for me to cover the unusual options activity of a single stock. 

As I perused the top 100 from yesterday, two of the top four options unusually active were from Nu Holdings (NU), the Brazilian fintech that’s got Warren Buffett and Berkshire Hathaway (BRK.B) as one of its shareholders. Berkshire owns 2.3% of Nu. But I digress.  

The first was the Oct. 20 $4.50 put. Its volume yesterday was 1,122x its open interest, making it number one in the top 100. The second was the Oct. 20 $5.50 put. It had a Vol/OI ratio of 221.97x, making it the fourth-most unusually active option on Wednesday. 

If Buffett owns it, I’m down with the stock. But, of course, it doesn’t hurt that I love Latin American stocks. 

However, the third most unusually active option from Wednesday’s trading was the Zoom Video Communications (ZM) Oct. 20 $80 put. Read on, and I’ll tell you why it, rather than Nu, got the nod. 

It’s Always Darkest Before the Dawn

I’ve probably used this subheading before, but it's appropriate in this instance, so that I will run with it. 

First, a few details about the put itself. 

It expires in 148 days or approximately 21 weeks. The bid price was $18.50. So if I’m selling the put, it’s a 29.5% yield based on the closing price of $62.63. That’s 72.8% on an annualized basis. So it’s currently well in the money, but there’s still a long way to go. 

So, here’s the thing. 

Zoom’s stock is down 89% since its all-time high of $588.84 in October 2020. By the time we get to expiration, three years will have passed, most of the time spent on a downward spiral. 

If you believe one iota about reversion to the mean, that’s as good a reason to nibble on the video-conferencing company’s stock. It’s bound for a revival at some point. Right? Well, maybe not. I guess we’ll find out. 

At the moment, it looks as though you’d be required to buy the 100 shares at $80 at expiration in October. However, because of the hefty premium income, the net paid would be $61.50, $1.13 lower than yesterday’s close. 

So, the question is: How much further do you think it will fall? It’s down nearly 7% year-to-date, 39% over the past year, and up less than 1% over the past five. The current 52-week low of $60.45 is also the stock’s all-time low. Zoom opened at $65 when it went public in April 2019. 

It’s never looked back until now.   

Value Then to Value Now

Based on 256.52 million shares outstanding after its IPO -- the underwriters exercised their 3.13 million over-allotment -- it had a market cap of $9.34 billion.  It closed the first day of trading as a public company with a $16.1 billion market cap, 72% higher. Today, its market cap is $18.4 billion.

But, consider the difference between its top and bottom lines for both periods. 

In fiscal 2019 (January year-end), it had revenue of $330.52 million and an operating income of $6.17 million. In fiscal 2023, its revenue was $4.39 billion, with $245.43 million in operating income. 

Let’s forget for a moment that at the height of the pandemic, its fiscal 2022 operating profit was $1.06 billion on $4.0 billion in revenue. It was like shooting fish in a barrel for the company. Now, it’s had to increase its research and development and sales and marketing expenses to find and keep clients. Unfortunately, that likely won’t change moving forward. 

However, despite an 80% reduction in operating margin, its gross margin improved slightly to 75%. In Q1 2024, it was 76.1%, four basis points higher than Q1 2023.

My point is that the gross profit would plummet if the business genuinely went to rat shit. It’s not. 

In the latest quarter, its operating income was only $9.7 million on a reported basis against $1.11 billion in revenue, 3% higher than a year earlier. Despite a 33% increase in operating expenses in the first quarter, it still generated $397 million in free cash flow. On an annualized basis, that’s $1.59 billion, good for a free cash flow yield of 8.6%. I consider anything above 8% to be in value territory. 

There is no question that Zoom remains a work in progress. However, of the 25 analysts covering ZM stock, according to Barchart.com data, the average rating is Hold (3.36 out of 5) with a mean target price of $87.25, 39% higher than its share price. 

The Bottom Line

Would I make Zoom my top pick? Absolutely not. 

However, the risk/reward proposition at this point is heavily stacked in your favor. All signs point to an $80 stock price within 12 months. 

Or, you could sell one of the two NU puts and call it a day.

 

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.