In less than a week, social media behemoth Facebook Inc (NASDAQ:FB) will step into the earnings confessional to release its fourth-quarter earnings results. And, once again, expectations are high. But there are two problems facing FB stock right now, investor concerns about slowing ad revenue growth and a the shares trading at overbought levels.
By the numbers, Facebook looks solid. Remember that Facebook posted better-than-expected third-quarter figures in November, and that it wasn’t until the company hinted at slowing ad revenue growth in the conference call that FB stock took a hit.
This time around, Facebook is expected to see earnings rise nearly 66% to $1.31 per share from 79 cents per share in the same quarter last year. Revenue, meanwhile, is expected to jump 45.4% to $8.49 billion. Those are impressive year-over-year gains for a company with heavy market saturation.
But expectations don’t stop there. According to EarningsWhispers.com, some on Wall Street have set their sights even higher, with the whisper number for Facebook’s fourth-quarter coming in at $1.37 per share. If the company tops this figure, it could go a long way to offsetting concerns about ad growth, especially is subscriber and monthly user numbers rise as well.
Taking a closer look at Wall Street’s expectations, Thomson/First Call reports that 44 of the 49 analysts following FB stock rate the shares a “buy” or better. That said, the brokerage bunch is only expected FB stock to rise about 16% in the next year, with the consensus price target resting at $153.72. A solid report next week could help lift this figure and boost FB stock.
Click to Enlarge Facebook stock options traders, meanwhile, are showing some signs of concern on the shares. Currently, the February put/call open interest ratio comes in at a relatively neutral reading of 0.82, with this reading standing pat for the 3 Feb. series as well.
The lack of heavy call OI heading into earnings reveals a bit of concern from options traders that FB stock could see a sell-on-the-news drop following next week’s results.
Overall, 3 Feb implieds are pricing in a potential post-earnings move of about a 5% for Facebook stock. This places the upper bound at about $139.43, while the lower bound lies at $125.57.
Technically, the $133 region is home to FB’s October highs, while short-term support lies in the $130 region.
2 Trades for FB Stock
Call Spread: FB stock’s rally heading into earnings could be an indicator that a strong showing is already priced in. However, if the company can give some signs of growth for its VR division and Oculus, or provide a positive update on ad growth, the rally will continue.
Traders looking to bet on a continued run higher for FB stock might want to consider a Feb $135/$140 bull call spread. At last check, this spread was offered at $1.58, or $158 per pair of contracts. Breakeven lies at $136.58, while a maximum profit of $3.42, or $342 per pair of contracts, is possible if FB stock closes at or above $140 when February options expire.
Put Sell: For those traders bullish on Facebook but concerned about FB trading near overbought levels or guidance on ad revenue growth, an FB put sell may be just the neutral path you are looking for. At last check, the 3 Feb $125 put was bid at $1.09, or $109 per pair of contracts.
As long as Facebook stock trades above $125 through expiration next Friday, traders pursuing this strategy will keep the $109 premium. However, if FB trades below $125 ahead of expiration, you could be assigned 100 shares for each contract sold at a price of $125 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
