UBS’ $100,000 trigger phoenix autocalls on Meta seen as range bound bet on volatile stock

By Emma Trincal

New York, July 14 – UBS AG, London Branch’s $100,000 of trigger phoenix autocallable optimization securities due July 17, 2025 linked to the common stock of Meta Platforms, Inc. offer a double-digit premium, which may appeal to income investors. But the trade only works if the stock price remains stable, which may not be the case, said Clemens Kownatzki, finance professor at Pepperdine University.

If Meta stock closes at or above the trigger price – 70% of the initial share price – on a quarterly observation date, the issuer will pay a contingent coupon for that quarter at the rate of 14.56% per annum, according to a 424B2 filing with the Securities and Exchange Commission.

Otherwise, no coupon will be paid that quarter.

If the shares close at or above the initial price on a quarterly observation date, the notes will be called at par plus the contingent coupon.

If the notes are not called and the shares finish at or above the trigger price, the payout at maturity will be par plus the contingent coupon. Otherwise, investors will be exposed to the share price decline from the initial price.

Rally

“This could be a good play if you’re moderately bullish and don’t expect the price to keep on going up. You’re capping your return and in exchange you get some downside protection,” said Kownatzki.

The share price of Meta has nearly quadrupled from a low of $88.09 in November to a one-year high scored on Thursday at $316.24.

This rally followed a 77% decline from the fall of 2021 to the November bottom.

“Last fall, Meta was really a buy. It had a P/E of 10, which is unheard of for big tech,” he said.

Metaverse conversion

Part of the decline then was due to a change of corporate strategy when CEO Mark Zuckerberg announced its new focus on the metaverse, he said.

“That’s when Facebook changed its name to Meta. Nobody seemed to like it. People punished the stock because the idea of jumping into this new metaverse project was not very popular among investors. The metaverse was not a mainstream concept. Most people thought the idea was either a bad idea or that it came too early.”

Copycat

But the bullish case on Meta can still be made given Zuckerberg’s successful acquisitions of new businesses and transformative vision, Kownatzki said.

“It’s a well-known fact that Zuckerberg is not so good at coming up with his own ideas. But he’s really good at copying others,” he said.

“When Zuckerberg purchased photo-sharing Instagram for $1 billion in 2015, people thought $1 billion was hugely expensive. But he did very well with this acquisition. Today, Instagram is a big contributor to Meta’s revenues.”

Zuckerberg created Facebook by replicating most of the features of MySpace, which was a pioneer in the social networking business at the time, he noted.

“Now he just launched Threads and that looks and feels a lot like Twitter.”

Threads is a new app Meta launched earlier this month. It is designed to share text updates and allow users to join public conversations.

“It’s obviously designed to compete with Twitter, and it will bring more revenues to the company,” he said.

Risk-adjusted return

Bullish investors are unlikely to buy the notes, he added.

“The cap would be too low.”

For many, Meta still has more upside potential given Zuckerberg’s constant search for innovation.

The stock is gaining even more traction since the company just announced a new open source for artificial intelligence, which is designed to compete with OpenAI, he said.

“Meta is jumping in the AI bandwagon.

“If you’re bullish, you’re not going to buy this note to cap yourself at 14% a year,” he said.

The stock is up 88% for the past year. So far in 2023, it has soared 157%, he noted.

Such strong uptrend should also raise red flags.

“I personally would be concerned with the 70% barrier. 45% or 50% would make me feel better,” he said.

Overall, the risk-adjusted return of the note may not be appealing given the cap and the barrier level, he said.

With a $309.34 initial price, the barrier threshold falls to $216.54, a level last seen in April.

“It doesn’t seem like a huge barrier,” he said.

But the most probable scenario was the automatic call.

“The stock is trending up. There’s still a pretty high chance that you’ll be called in October.

“So, you’ll pocket 3.65% in three months and that’s it. Is it worth the risk? Not to me. I would be willing to take the risk if I had a strong downside protection. But 70% is cutting it too close,” he said.

Not steady

Only investors who expect the stock to trade sideways would benefit from the note, said Kownatzki, who said he did not hold such a view.

“I don’t think Meta will stay put.

“If I wanted to play the range bound view, I would use a call spread, not this note, and I would do it for a short period of time, like 90 days, to see what happens.

“But I wouldn’t buy the note.”

“The stock could make sharp moves in either direction. You run the risk of underperforming if it surges or losing money if it breaches the barrier.”

UBS Financial Services Inc. and UBS Investment Bank are the underwriters.

The notes priced on Wednesday.

The Cusip number is 90301U316.

The fee is 1.5%.

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