ABNB - IPO ETF: May Be Poised For A Breakout

2023-09-12 03:20:11 ET

Summary

• Renaissance IPO ETF has experienced a decline of almost 15% since our previous recommendation to sell option premium.
• The fund's implied volatility is currently trading at an ultra-low level, indicating potential for options to increase in value over time.
• IPO's technical chart shows a saucer bottom pattern and a golden cross, suggesting a potential breakout from its multi-year consolidation period.

Intro

We wrote about Renaissance IPO ETF ( IPO ) back in February of last year when we recommended that investors take advantage of the fund's high implied volatility at the time by selling option premiums. (specifically, call ratio spreads). The Renaissance Capital managed fund invests in both value & growth entities in US public equity markets. Our bearish bias in IPO at the time ended up being correct as the fund continued its technical pattern of lower highs after our commentary. Shares now find themselves almost $6 a share down or almost 15% since that piece roughly 18 months ago.

In terms of the fund's implied volatility, we have seen a role reversal in IPO in that now the fund is trading with an ultra-low number compared to what we have been accustomed to in this fund. IPO's forward-month IV for example of just under 27% is way below its 52-week average so we would expect over time to see IV revert back up to its mean over time. Therefore, the opportunity in IPO (from an options standpoint) is the fund's options increasing in value over time. We believe that opportunity will take place on the call side (meaning we believe the fund will rally over time). Here are two key areas that back up our bullish thesis but only when the opportunity presents itself.

First, if we go IPO's technical chart. Here we see a saucer bottom which is a rounded bottoming pattern that invariably tends to take place over a long period of time. Therefore, given the fact that the formation is well over 12 months old and that we now have a golden cross in play (crossover of the fund's 50-day moving average above its 200-day counterpart demonstrating long-term momentum ), IPO shares look like they will eventually break out of their multi-year consolidation period.

Profitability Within The Fund On The Rise

Profitability trends within IPO's top holdings confirm the bullish technicals alluded to above. Airbnb, Inc. ( ABNB ) which is IPO's top holding (11.68%) is just off the back of yet another quarterly earnings beat last month (Q2) reporting GAAP earnings of $0.98 per share. Airbnb has now reported 9 consecutive quarterly earnings beats which has led to multiple upward earnings revisions where earnings for the year are now expected to grow by 37% over fiscal 2022.

IPO also manages holdings in segments of the technology sector where Snowflake Inc. ( SNOW ) & Palantir Technologies Inc. ( PLTR ) hold a 9% & 6.28% weighting respectively. Again, we see strong trends in both of these stocks with respect to their current profitability and how forward-looking estimates have been changing for the better. Snowflakes' current EPS estimate for its present fiscal year comes in at $0.69 per share (177% growth year over year) and continues to be revised upward. Palantir is also expected to report robust bottom-line growth this year ($0.23 per share) where again the company's annual bottom-line estimate continues to get dialed upward.

Steep Valuation & Risk Control

Although IPO as mentioned also invests in value plays, its top three holdings (which all are in strong growth mode) alluded to above make up almost 27% of the assets within the fund. Suffice it to say, that Airbnb, Snowflake & Palantir are not cheap as we see with their trailing sales multiples of 10.2, 21.96 & 15.54 respectively. Suffice it to say, any meaningful retraction from expected growth rates in these companies would undoubtedly affect IPO's bullish intentions (which would consequently only lead to more consolidation in IPO)

In fact, the makeup of the growth stocks within IPO means that implied volatility & short interest are both above average in terms of risk compared to the ETF average. Therefore, we reiterate that long positions should not be scaled into until overhead resistance of close to $37 a share is taken out in due course . As alluded to above, IPO's present bottoming pattern may end up playing itself out for many more months to come so patience is required until we get our signal.

Conclusion

To sum up, we continue to believe that the Renaissance IPO ETF has potential due to how its top holdings have been performing and its encouraging technicals. The fund's call options remain underpriced so if we get a technical breakout any time soon, a long-term call option purchase may be the play here if there is enough liquidity in the contracts. We look forward to continued coverage.

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