Expectations may be high for Facebook Inc. (NASDAQ:FB) heading into the company’s first-quarter earnings report, but all indications are that the social media giant is more than up to the task.
According to a recent report by Gigya, Facebook now controls roughly two-thirds of the social media market, easily besting No. 2 Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL) at 21% and coming in at more than 10 times the 6% share of Twitter Inc. (NYSE:TWTR).
It’s no wonder the bulls are running full steam for FB stock.
Digging into the numbers, Wall Street is forecasting earnings of 40 cents per share, up 17.6% from the same quarter last year. Additionally, revenue is projected to come in at $3.6 billion, up 42.1% from year-ago levels.
Analysts are expecting strong mobile and video ad revenues for Facebook, with excitement brewing over the potential future impact of units like Instagram, WhatsApp, Messenger and Oculus. This excitement can be seen in FB’s whisper number, as EarningsWhisper.com reports this figure coming in at 42 cents per share for the first quarter.
But the bullish sentiment doesn’t stop there. According to data from Thomson/First Call, 44 of the 50 analysts following FB stock rate it a “buy” or better, compared to a measly five “holds” and one “sell” rating. There is room for potential improvement, however, as the 12-month consensus price-target of $92 represents a modest premium of about 11% to yesterday’s close.
Optimism has also taken hold in the options pits. Currently, FB’s April/May put/call open interest ratio comes in at 0.58, with calls nearly doubling puts among options set to expire within the next month. This ratio climbs somewhat when we zero in on the weekly April 24 series, arriving at 0.75, but a touch of caution ahead of an earnings event is to be expected.
Click to Enlarge Overall, weekly April 24 series implieds are pricing in a potential post-earnings move of about 58%. This places the upper bound at $87.81, while the lower bound lies at $78.19. Technically, FB stock has had trouble leaving the security of the $80 level behind, and a breakout above $85 could bring more technical buyers to the table. Damage from a post-earnings sell-off, meanwhile, should be limited by support at FB’s March lows and the stock’s 200-day moving average.
2 Trades for FB Stock
Call Spread: Heavy bullish sentiment can be a warning sign for contrarian investors, but only when the underlying stock is performing poorly in response. FB stock has enjoyed a solid run higher during the past several months, and a strong report tomorrow should only add fuel to the fire. As such, traders looking to jump on the bullish bandwagon might want to consider a May $84/$88 bull call spread.
At last check, this spread was offered at $1.44, or $144 per pair of contracts. Breakeven lies at $85.44, while a maximum profit of $2.56, or $256 per pair of contracts, is possible if FB stock closes at or above $88 when May options expire.
Put Sell: For those traders that are concerned that FB’s upside may be limited due to excess optimism or technical resistance levels, a put sell may be just the neutral path you are looking for. At last check, the weekly April 24 series $77 put was bid at 48 cents, or $48 per pair of contracts.
As long as FB stock trades above $77 through expiration this Friday, traders pursuing this strategy will keep the $48 premium. However, if FB trades below $77 ahead of expiration, you could be assigned 100 shares for each contract sold at a price of $77 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.