Last week was the height of second-quarter earnings season, but this week’s calendar will be just as exciting. Current earnings have been about the same as in recent quarters, with roughly 70% of companies beating expectations. However, revenue numbers seem to be coming in lighter, and that is the true measure of sustainable profits.
Earnings for Facebook (FB) following Wednesday’s close will be the most anticipated announcement of the week. The company is expected to earn 47 cents a share on revenue of nearly $4 billion. Facebook has topped estimates in the past four quarters by 2 cents, 5 cents, 3 cents and 10 cents, respectively.
In April, the 2-cent beat was accompanied by a revenue miss — FB earned $3.54 billion versus estimates for $3.56 billion. Shares fell from $84.63 to $82.41 the day after the announcement but tested a low of $76.79 into mid-May.
In January, the 5-cent beat came on better-than-expected revenue of $3.85 billion versus $3.77 billion. Shares rallied from $76 to $78 the following session but faded to $73.75 into early February.
There have been numerous “buy” ratings and raised triple-digit price targets on Facebook during the past several weeks. Last Monday, one brokerage firm raised its price target from $80 to $117.
The prior week, another firm reiterated its “buy” rating and a $108 price target on Facebook. Morgan Stanley raised its price target to $110 and kept an “overweight” rating on the stock.
And, finally, at the start of July, Facebook made Bank of America Merrill Lynch’s “Top 10 Ideas for Q3,” while another Wall Street firm raised its price target to $100 from $92. Shares were pushing $87 coming into the month.
FB stock traded to an all-time high of $99.24 last week and is carrying high expectations coming into the announcement. While I do expect the company to beat on the top and bottom lines, I wouldn’t be surprised to see a miss on goodwill charges or other impairments either.
There are weekly and monthly options available to trade on Facebook. While the weekly options provide more bang for the buck, I mentioned earlier that shares tend to make a much larger move after the earnings announcement. For this reason, I looked at the August option chains for a possible trade.
Although analysts are extremely bullish on Facebook, it is possible that shares are setting up for a “sell-the-news” event given the run this month. The Aug $90 puts priced at $3.30 look tempting, but they are expensive. The breakeven point for these options is when FB shares are trading at $86.70, technically, by mid-August. This would require a 10% pullback in the stock from current levels, which is a risky bet, especially on an earnings beat.
The Aug $105 calls, priced at last check at $1.85, were active on Friday, as nearly 7,000 contracts traded hands. These options have also become juiced, as the breakeven point for this bullish trade is now at $106.85, technically, by mid-August. This would also require a double-digit percentage move in the stock to the upside for the trade to start making money.
The premium for both of the aforementioned call and put options would be a little more than $5 as a straddle option trade. This strategy is considered a “safer” way to play a possible large move in a stock, but it too is expensive. To break even, FB would need to be above $110 or below $85, technically, by mid-August. While this is possible, it’s not the best risk/reward setup.
There is no overhead resistance in the stock once $100 clears, so a run to $105-$110 could easily be reached on short covering. However, an earnings miss or lowered guidance could have shares falling below $90 and testing $86 and the 50-day moving average.
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