GDOT Straddle

GDOT just got the green light from Walmart:

Green Dot’s (GDOT) contract with Wal-Mart Stores (WMT) got renewed last night–and judging by the size of the move in its shares today–they’re up more than 30%–I’m guessing not many people thought it would.  Susquehanna’s James Friedman explains why the deal was such a big deal for Green Dot:

DANNY JOHNSTON/ASSOCIATED PRESS

Tonight GDOT announced it has entered into a new agreement with Walmart, whereby GDOT will continue to serve as the program manager and issuing bank for the Walmart MoneyCard program. Recall, Walmart is GDOT’s largest distribution partner, and the MoneyCard program is GDOT’s largest contract with Walmart (~30% of revenue). The initial term of this new agreement is for five years and will become effective starting May 1, 2015…

Despite two months impact under the new terms, management reaffirmed Q2 guidance as business had been tracking better than expected. That said, management did not update FY15 guidance given: 1) uncertain impact from new MoneyCard contract, and 2) benefits from several new business initiatives.

Management indicated full-year impact to FY15 adjusted EBITDA margin from the new contract will be less than ~200 bps. Our analysis suggests a 6% increase in MoneyCard commission will impact adjusted EBITDA margin by 200 bps assuming GDOT generates 30% revenue from MoneyCard program. Recall, in the prior Walmart renewal GDOT saw a 230 bps impact on margin from a 4% increase in commission – subsequent to which margins recovered in 12 month.

Green Dot also said it would spend $150 million buying back its shares, but JPMorgan’s Tien-tsin Huang and team still need to see more from the Neutral-rated company:

GDOT announced the long anticipated outcome of its Walmart MoneyCard contract renewal this afternoon, and the new terms were better than feared. Specifically, we believe the duration (5 years + 2-year option) and revenue share were better than most bearish expectations, and likely eases buyer anxiety on the stock with GDOT’s largest customer locked up. We expect a positive stock reaction to the news (and reiteration of 2Q guide and buyback), but we remain Neutral the shares, because our concerns have been less about the renewal risk, but rather the growth prospects of the portfolio since it has been shrinking for several quarters now. But, with the renewal behind the company on good terms, we are optimistic that it can now refocus its energy on returning to growth.

A big plus for GDOT. The market pounced in it like a loose football. But can it stay this high in price? If you read between the lines from the above release, it boils down to analysts just arent that sure. Today is the flush of new news. The honeymoon will wear off with investors as they take a serious look at this stock and wonder where things are going from here. I see a lot of potential movement in this stock which is why I decided to do a straddle. Things really jumped abmornally high with a huge gap up. I dont see this flatlining soon, so I decided to go out to the sept strikes to give us more time. Below is the straddle..I bought both a call and a put at the money.

So with this out a few months, we have time to see what shakes out with GDOT. Hopefully a big move up or down. Look how the calls jumped today with the news.By 8 times. Usually such a big movement precedes other movements of lesser magnitude. Thats what I am banking on.

Check back 15 minutes before market close so as to see what I decided to do with TNXP: Get in or stay out.

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