Expectations are high heading into Facebook Inc’s (FB) first-quarter earnings report tomorrow. Wall Street is looking for earnings and revenue to rise roughly 48% year-over-year, with the consensus expecting a profit of 62 cents per share on sales of $5.25 billion.
Sentiment is quite bullish among analysts and options traders, but with Facebook stock retreating heading into the event, there is plenty of potential for a post-earnings rally.
Fundamentally, Facebook has regained its feet during the past two reporting periods, posting strong earnings beats in the third and fourth quarters. Heading into fiscal 2016, Facebook’s prospects look good in both mobile advertising and the new market of VR entertainment, with its Oculus Rift VR headset already selling out in preorders.
Keying off FB stock’s growth potential, analysts have set their sights a bit higher than the consensus. Specifically, EarningsWhisper.com reports that the first-quarter whisper number for Facebook stands at 65 cents per share — three cents better than the Street.
Digging deeper, we find that Facebook stock has attracted considerable bullish sentiment in the brokerage community. Data from Thomson/First call reveals 46 buy ratings on FB stock, compared to just three holds and one sell rating. The 12-month consensus price target is a bit more moderate, arriving at $135.30.
There are signs of concern in Facebook stock’s options backdrop, however. Currently, the April/May put/call open interest ratio comes in at a respectably bullish 0.68, with calls easily outnumbering puts among near-term options. However, this ratio rises to 0.77 for the weekly April 29 series, as traders show a bit of concern for FB amid current market conditions.
Click to Enlarge Overall, weekly April 29 series implieds are pricing in a potential post-earnings move of about a 7% move for Facebook stock. This places the upper bound at about $117.80, while the lower bound lies at $102.40. Technically, the $118 region is near FB’s February highs, while support lies in the $102/$100 region.
2 Trades for FB Stock
Call Spread: The recent pullback in Facebook stock heading into tomorrow’s quarterly report should be seen as a bullish opportunity. Despite the recent market turmoil, FB stock remains in a long-term uptrend, and tomorrow’s earnings should serve to confirm the Street’s bullish bias.
Traders looking to jump on the bullish bandwagon might want to consider a May $110/$120 bull call spread. At last check, this spread was offered at $3.54, or $354 per pair of contracts. Breakeven lies at $113.54, while a maximum profit of $6.46, or $646 per pair of contracts, is possible if FB stock closes at or above $120 when May options expire.
Put Sell: For those traders concerned about broad-market headwinds, an FB put sell may be just the neutral path you are looking for. At last check, the weekly April 29 series $98 put was bid at 37 cents, or $37 per pair of contracts.
As long as Facebook stock trades above $98 through expiration this Friday, traders pursuing this strategy will keep the $37 premium. However, if FB trades below $98 ahead of expiration, you could be assigned 100 shares for each contract sold at a price of $98 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
