The stock market uptrend has gained some steam, particularly on the Nasdaq, with several top-rated growth stocks performing well. Count Snowflake stock among them.
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Snowflake (SNOW) headlines a quiet, yet high-profile week of earnings reports, along with Nvidia (NVDA), ELF Beauty (ELF), Workday (WDAY) and Palo Alto Networks (PANW).
New Relic (NEWR), tracked in the same industry group as Snowflake, reports Tuesday after the close. Shares jumped Wednesday after the Wall Street Journal reported that two private-equity firms are prepared to bid $5 billion for the database software firm.
Snowflake Stock Jumps
Snowflake rallied with technology stocks Thursday on news that the database software provider is in advanced talks to acquire AI search startup Neeva, founded by former Google ad executive Sridhar Ramaswamy. The news helped Snowflake stock jump past its Feb. 2 high of 178.70.
If a deal is consummated, Snowflake could offer AI-powered search capabilities to help customers search for information in internal documents and large data sets.
Snowflake sells data analytics and management tools that run on cloud-computing platforms like Amazon Web Services.
In early March, Snowflake reported a loss of 64 cents a share. Revenue growth slowed again but was still impressive, up 53% to $589 million. That was slightly better than the $575.9 million consensus estimate. But Snowflake forecast product revenue growth of $568 million to $573 million, below analysts’ consensus estimate at the time of $575.9 million.
For the current quarter, the Zacks consensus estimate is for adjusted profit of 5 cents a share, with revenue up 44% to $607.47 million. Results are due Wednesday after the close.
Workday Retakes 50-Day Line
After some heavy-volume declines, WDAY stock has been rallying back in light volume. Earnings growth has been choppy in recent quarters, but the company has delivered six straight quarters of 20%+ revenue growth.
Results will be out Thursday after the close. For the current quarter, adjusted profit is expected to come in at $1.10 a share, up 32.5% from the year-ago period. Revenue is seen rising 16% to $1.67 billion.
Meanwhile, two strong price performers in the stock market — Nvidia and ELF Beauty — report Wednesday after the close.
Earnings and revenue growth has been accelerating in recent quarters at ELF Beauty, and Wall Street expects another quarter of robust growth. Quarterly profit is expected to jump 54% to 20 cents a share, with revenue up 49% to $156.8 million.
NVDA joined IBD Leaderboard in February, when the stock gapped up on earnings. Profit and revenue declined from a year ago. But data center revenue increased 11% to $3.62 billion. For the quarter ended in April, Nvidia forecast revenue of $6.5 billion, slightly above the consensus at the time of $6.33 billion.
Palo Alto Networks, meanwhile, has come under selling pressure after surging above its 50-day moving average earlier in the month. The stock’s relative strength line has started to bend lower as PANW lags the S&P 500.
Palo Alto still offers a compelling growth story despite a high valuation. Over the past four quarters, profit growth has ranged from 30% to 81%. Over the same time, revenue growth has ranged from 25% to 29%.
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 call option trade recently looked like for Snowflake stock.
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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 averages 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.
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.
See Which Stocks Are In The Leaderboard Portfolio
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 how a recent call option trade looked for Snowflake, a liquid name in the options trading market.
When Snowflake stock traded around 182.25, a slightly out-the-money weekly call option with a 182.50 strike price (May 26 expiration) came with a premium of around $8.85 per contract, or 4.8% of the underlying stock price at the time.
One contract gave the holder the right to buy 100 shares of Snowflake stock at $182.50 per share. The most that could be lost was $885 — the amount paid for the 100-share contract.
When taking the premium paid into account, Snowflake stock would have to rally past 191.35 for the trade to start making money (182.50 strike price plus $8.85 premium per contract).
A call-option trade for Workday was reasonably priced. When WDAY traded around 195, an in-the-money call option with a 195 strike price (May 26 expiration) offered a premium of $6.50, or 3.3% of the stock price.
Follow Ken Shreve on Twitter @IBD_KShreve for more stock market analysis and insight.
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