UBS’ $3.28 million autocalls on CrowdStrike offer timely bet but risky single name exposure

By Emma Trincal

New York, March 11 – UBS AG, London Branch’s $3.28 million of phoenix autocallable notes with memory interest due March 22, 2023 linked to CrowdStrike Holdings, Inc.’s shares provide an attractive structure and a timely tactical play on a thriving cybersecurity industry, said Clemens Kownatzki, finance professor at Pepperdine University.

But the narrow exposure to a single stock makes the deal risky, especially given the volatility of the underlying.

If the stock closes at or above the interest barrier level, 60% of the initial level, on a quarterly observation date, the notes will pay a contingent coupon for that quarter at an annual rate of 21%, plus any previously unpaid contingent interest payments, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par plus any unpaid coupons if the shares close at or above the initial share price on any quarterly observation date other than the final date.

The payout at maturity will be par if the stock finishes at or above the 60% trigger level; otherwise, investors will be fully exposed to the decline of the stock.

“This is an interesting structure with a short duration and a high-paying coupon. The terms are quite attractive, but you have to be really familiar with the stock,” said Kownatzki.

Wild swings

One of the main characteristics of the underlying is its elevated volatility as evidenced by wide price swings both up and down seen in the recent months.

“The share price jumped on Wednesday after the earnings. That’s expected whenever the surprise is positive,” said Kownatzki.

The stock was trading 13.5% higher in Wednesday’s after-hours session after the company reported better-than-expected fourth-quarter results after the close. The price moved from its $169.79 closing level on that day to $192.60.

Even the volatility of the stock is “volatile.”

On Wednesday, the stock’s implied volatility surged to 84% but fell to 70% on Friday. As a comparison, Tesla Inc. has an implied volatility of 71% while the broadly diversified S&P 500 index has an implied volatility of 22%.

On Thursday, the earnings momentum continued to push the stock higher to $198.67.

“Obviously if you bought the notes before the announcement, it’s a great entry,” he said.

Earnings boost

The company released its earnings on March 9. The notes priced five days before.

Investors in the notes benefited from the timing.

“The stock just had a big run since pricing,” he said.

The initial price of the stock on the trade date was $173.03.

In its short history – CrowdStrike went public on June 11, 2019, at $34 a share – the stock has been on a roller coaster ride.

In November, the stock price hit an all-time high at $298.48.

At the end of January, it dropped to $150 before rallying to $200 in the beginning of March.

Then the price dropped again to $155 on May 8, a day prior to the earnings announcement, moving back up to the $190-$199 range. It closed at $190.54 on Friday.

The stock dropped nearly 50% from November to the end of January, he noted.

“This is not for the faint of heart.

“Of course, you’re going to get attractive terms with such high level of volatility,” he said.

Growth opportunity

Despite recent declines, Kownatzki said that within the term of the notes, the stock should go up.

“I’m very bullish about the space.

“Cloud-based protection platforms benefit from the proliferation of hackers’ threats.

“Cybersecurity is a vital area to be in. You need to be invested in that space because the threat of cyber attacks is not going away.

“With Russia threatening cyber-attacks on the U.S., the need to provide protection from potential breaches is growing. It will generate additional revenues for this company and others.

“I can see the space continue to grow. It’s not going away any time soon,” he said.

What the war could bring to cyber-security stocks like CrowdStrike is akin to the benefits big tech companies enjoyed during the Covid-19 shutdowns, he said.

“During the pandemic, you had no retail, no travel, no office. People lived online. They worked from home. As a result, companies like Amazon, Zoom, Facebook and Apple led the way,” he said.

“I can use the same thought process with cybersecurity. We’re at the center of a global conflict. It’s a modern cyber warfare. This is bullish for the sector especially if the Ukrainian conflict continues for another six months, year or 18 months.”

Terms

While the tenor is one year, Kownatzki expects a shorter duration for the notes.

“There is a high probability that you will get called on the first or second period,” he said.

“So, you end up with a short-term investment. But getting 5% in three months or 10% in six isn’t bad.”

Kownatzki was relatively confident about the downside.

“The 60% protection is reasonable,” he said.

“Is the barrier breachable? You always have to consider the risk.

The trigger level is at $107.42, a level last hit in the summer of 2020.

“You could argue for instance that the Russian story has already been priced in.

“But in my view 60% should be enough in a sector that should continue to grow,” he said.

The upside payout also offered notable benefits.

“The 21% coupon is attractive,” he said.

“I like the fact that you have this memory function. If you miss the payment on one period, you get that coupon back at some point.

“I don’t have any issue with the structure.”

Company risk

His main concern with the notes was investors’ exposure to a single stock.

“This is still a relatively new company,” he said.

Investors should conduct in-depth analysis about the company, its business model, its fundamentals, and its performance history before considering the notes, he said.

“You have to find out if CrowdStrike is the right company because they’re not the only player in the field.

“You have a ton of other vendors providing security against cyber-attacks,” he said.

He cited direct competitors such as Palo Alto Networks Inc. and Datadog, Inc.

“You also have indirect competitors, tech giants like Amazon and Cisco, which also provide cloud-based security services.”

Getting good terms on a note and a tactical exposure to a growing sector may be a good start. But investors may still be incurring a high level of risk, he said.

“Rather than having exposure to only one stock, I would rather be invested in the entire space,” he said.

“It may be more appropriate to pick a note tied to a cybersecurity ETF. There are many out there like CIBR, HACK and BUG.”

The tickers “CIBR,” “HACK” and “BUG” referred to First Trust Nasdaq Cybersecurity ETF, the ETFMG Prime Cyber Security ETF and the Global X Cybersecurity ETF, respectively.

“A company can always run into problems. There is always uncertainty attached to a single name irrespective of your macroeconomic or sector outlook,” he said.

UBS Investment Bank and J.P. Morgan Securities LLC are the placement agents.

The notes settled on Wednesday.

The Cusip number is 90279DJ23.

The fee is 1%.

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