Morning Commentary: Cloudflare falls outright, flat dollar-neutral; Snap under pressure

By Abigail W. Adams

Portland, Me., April 28 – While the convertibles secondary space saw another slow start to the day with investment-grade issues driving volume, earnings-related volatility continued to push outstanding issues into the spotlight.

Equity markets opened lower but brushed off losses to extend the strong gains from the previous session as investors weighed mixed earnings and macro data, which continued to signal high inflation.

The Dow Jones industrial average was up 199 points, or 0.59%, the S&P 500 index was up 0.55%, the Nasdaq Composite index was up 0.29% and the Russell 2000 index was up 0.64% shortly before 11 a.m. ET.

There was $79 million in reported volume about one hour into the session with earnings continuing to drag down certain issues while the tone in the broader market improved.

Cloudflare Inc.’s 0% convertible notes due 2026 were active as the cybersecurity firm’s stock led losses in equity markets.

The high-premium notes fell 2.25 point outright with stock off more than 25%.

They traded down to 82.25 early in the session.

The notes were moving in line dollar-neutral on a theoretical hedge of about 30%, a source said.

Cloudflare’s stock was changing hands at $43.60, a decrease of 26.55%, shortly before 11 a.m. ET.

Cloudflare had a strong quarter with earnings per share of 8 cents versus analyst expectations for earnings per share of 3 cents on revenue of $290 million, which was in line with expectations.

However, Cloudflare downwardly revised its revenue guidance for 2023 to $1.28 billion from prior guidance of $1.33 billion to $1.34 billion, which triggered a sell-off in the stock.

Snap Inc.’s 0.75% convertible notes due 2026 were under pressure on an outright and dollar-neutral basis with the social media company’s stock also among the largest losers in equity markets.

The 0.75% notes sank 3.5 points outright to 86.75 in early trade.

They contracted about 1.25 points dollar-neutral.

Snap’s stock was seen at $8.52, a decrease of 18.67%, shortly before 11 a.m. ET.

Snap reported mixed earnings with earnings per share of 1 cent, versus a loss per share of 1 cent that was expected, on revenue of $989 million versus the $1.01 billion expected.

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