Social media giant Facebook Inc. (NYSE:FB) is to step into the earnings confessional after the close of trading tomorrow afternoon, and Wall Street appears to have set the bar pretty high.
Historically, FB has put up solid fundamentals, topping the consensus forecast in five of the past eight quarters. But will strong sales be enough, or will acquisition expenses and subscriber numbers drag Facebook stock lower?
Digging into the numbers, Wall Street is expecting Facebook revenue to increase 46% from last year, to $3.8 billion. On the surface, this growth appears impressive until you compare it with the company’s first-quarter revenue growth of 72%. What’s more, revenue growth has been decelerating for the past three consecutive quarters.
Elsewhere, earnings are expected to arrive at 48 cents per share, while the whisper number comes in at 50 cents per share, according to EarningsWhisper.com. Finally, look for daily active user growth to continue –- in the third quarter Facebook reported 864 million daily active users and 1.35 billion monthly active users, up 19% and 14% year-over-year, respectively.
The analyst community doesn’t appear to have many growth concerns for Facebook stock. According to Thomson/First Call, FB stock has attracted 41 “buy” ratings and six “holds,” with nary a “sell” to be found. While the top is a bit crowded, there is still room for potential price-target increases, as the current consensus 12-month target of $90 represents a modest premium of only about 16% to Facebook stock’s current perch.
On the options front, calls have been the investment vehicle of choice for FB during the past several sessions. In fact, calls accounted for 72% of Facebook’s total option volume on Monday. As a result, the January/February put/call open interest ratio has slipped to a reading of 0.64, with calls nearly doubling puts among short-term options contracts.
So far, the most popular contract is the out-of-the-money $80 strike call in the Jan 30 series of options, with 10,252 contracts in open interest.
Click to Enlarge Speaking of FB weekly Jan 30 series options, implieds for this soon-to-expire series are pricing in a potential post-earnings move of about 6.4% for Facebook stock. This places the upper bound near $82.43, while the lower bound lies at $72.57. In other words, those $80 strike calls in the Jan 30 series have a good shot at finishing in the money if Facebook stock rallies in the wake of tomorrow’s report.
Technical resistance at $80 remains a concern, while FB’s all-time high lies just above at $82.17. Support, meanwhile should materialize first at $75, then in the $70-$71 region, which is home to FB’s 50-day moving average.
2 Trades for FB Stock
Call Spread: For those traders looking to join the bullish stampede on Facebook stock, a Feb $77.50/$82.50 bull call spread has quite a bit of potential. At the close of trading on Monday, this spread was offered at $2.04, or $204 per pair of contracts. Breakeven rests at $79.54, while a maximum profit of $2.96, or $296 per pair of contracts, is possible if Facebook stock closes at or above $82.50 when Feb options expire.
Put Sell: Alternately, if you’re not all that confident in Facebook stock, a $70 put sell in the weekly Jan 30 series has a high probability of finishing out of the money. As of the close last night, this option was bid at 30 cents, or $30 per contract. As usual with a put sell, you keep the premium as long as Facebook stock closes above $70 when weekly Jan 30 options expire at the end of this week. On the downside, if FB trades below $70 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $70 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
