Five9’s Unusually Active $65 Put Option Is Worth a Look

Five9 (FIVN), the California-based cloud-based contact center software provider, had busier than average options trading on Wednesday with a volume of 6,998, 6x its 30-day average. It was nearly as busy the day before, 4.5x its 30-day average. 

What is going on with Five9?

According to Barchart.com data, 1,256 options exhibited unusual options activity on Wednesday. For example, Five9’s July 21 $65 put option had the ninth-highest Vol/OI ratio of 33.91x. 

While the company also had an unusually active call option yesterday, the put is more appealing. You might want to look closely at it and the company itself. 

What’s Five9’s Allure?

There isn't any question that there is a need for the company's cloud-based contact center software. The pandemic demonstrated just how important it was for companies to be able to provide customer support from anywhere in the world. Five9’s Call & Contact Centre as a Service platform allows them to do it. 

The company uses artificial intelligence (AI) to reduce the routine and repetitive tasks customer service agents have to perform, leaving them to provide customers with more value-added service while lowering overall costs. 

That’s a win/win. 

Speaking of AI, Five9 announced on March 28th that it was introducing its Agent Assist 2.0 with AI Summary, powered by OpenAI. 

“Incorporating generative AI technology into agent assistance is the natural next step for CX teams, and we are committed to helping businesses apply the technology to gain quick wins,” stated Callan Schebella, EVP, Product Management for Five9. 

Agent Assist 2.0 is used by call center agents to quickly transcribe a phone call and summarize the highlights of the call. However, AI takes it to another level.

“The key difference between this and prior versions is the removal of model training and manual categorization. This is possible because LLM [large language models] technology can be fed a call transcript and a request to summarize it, and it produces high quality results over a large set of conversations, without any prior training on what the conversation is about,” stated its March 28 press release.  

So, now, it can record, transcribe, and fully summarize the call in seconds without any special modeling by ChatGPT-3. That’s essential to good customer service because the next agent who gets a call from that customer will have a better idea of the previous discussion. 

If you’ve ever worked in a call center -- I did early in my business career -- you’ll understand how important that is for freeing you up to take care of more urgent matters than summarizing calls by hand. 

It’s Getting Closer to GAAP Profitability

In 2022, Five9 grew revenue by 28% to a record $778.8 million and a non-GAAP profit of $106.7 million, 29.8% higher than a year earlier. Unfortunately, it lost $94.7 million on a GAAP basis, considerably higher than in 2021. However, when you consider it spent 32.6% and 35.1% more on research and development and sales and marketing, respectively, it is priming the pump to pour out future profits. 

Two areas of optimism for the company: International expansion and enterprise sales. 

In 2022, its international revenue rose 44% and now accounts for 9.8% of Fiven’s total revenue, up 9.5% in 2021. More importantly, its international bookings increased by 87% in the fourth quarter, partly due to entering new markets like Germany and Spain. 

Slowly but surely, it’s bringing its software to the world.

Secondly, it’s attracting more prominent clients. In 2022, it had 161 customers generating $1 million or more of annual recurring revenue (ARR), up from 134 a year earlier. That’s a 20% increase in higher-generating customers. 

Its enterprise customers now account for 86% of revenue, up from 60% when it went public in 2014. 

In 2023, it expects at least $900 million in revenue with non-GAAP earnings per share of $1.69 at the midpoint of its guidance, 11% higher than in 2021. 

Something tells me its guidance is conservative. 

Analysts Like FIVN

Not that analysts are the be-all and end-all, but the 18 analysts covering Five9 give it a Moderate Buy rating (4.33 out of 5) with a mean target of $87.74, 32% higher than where it’s currently trading. 

Whenever you’re considering a stock where the company loses money, there’s always a risk that those losses will accelerate, eventually leading to financial distress. However, I don’t believe that to be the case with Five9. It finished 2022 with net debt of $175 million or just 4% of its market cap and 14% of its total assets. 

It’s got plenty to keep focused on its growth strategy. 

As for the July 21 $65 strike, I like it for a couple of reasons. 

First, if you sold the put on Wednesday, your bid price might have been $4.90, a 7.3% yield from its $67.57 closing price. With 92 days to expiration, the annualized return would be 29.0%. That’s very attractive. 

Of course, if you want to buy the stock, it has to fall below $65. Assuming it does, you’re not losing on the bet until it hits $60.10. The last time it traded below $60 was in November. Before that, you have to go back to October 2019.

I like the risk/reward proposition here.    

 

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.