Following earnings on April 27 that beat on both the top and bottom line, shares of Facebook Inc (FB) traded up to all-time highs at $120.79.
Since that time, however, FB stock has pulled back slightly and is trading sideways. If past history is any guide, I look for Facebook continue this consolidation over the next month.
Looking back over the past seven earnings report periods, a definite pattern has emerged. Facebook stock initially rallies sharply following the earnings release, only to pullback and trade sideways once the initial spike has run the course. The chart below highlights this phenomenon.
Click to Enlarge While FB earnings were impressive on the earnings beat, coming in at 77 cents versus the consensus estimate of 62 cents (non-GAAP of course), the revenue beat was much less impressive at $5.38 billion compared to estimates of $5.26 billion.
The most important category, Mobile Monthly Active Users (MAU), grew 21% year-over-year to 1.51 billion. Mobile now accounts for 82% of advertising revenue.
As I have noted in previous posts, the law of large numbers begins to apply to mega-cap stocks such as Facebook, which currently is the fifth largest U.S. stock. So future growth rates will be much more difficult to maintain, a definite hindrance to a stock trading at a 92 price-to-earnings ratio.
Click to Enlarge Overall, FB saw total MAU (mobile and non-mobile) increase to 1.65 billion people in Q1. Doing the math, with MAU of 1.65 billion and quarterly revenues of $5.26 billion, this equates to $3.19 per person in revenue over the first three months, or roughly a little over $1 per month per person. That certainly may be worth considering when evaluating the valuation metrics for FB, especially one trading at over 18 on a price-to-sales basis.
Click to Enlarge The options market has become rather complacent, with FB options now trading at near the lowest levels of implied volatility (IV) for the year. This level of indifference normally is a good contrarian indicator of a short-term top in the stock.
To position for a sideways period in FB stock, a short call spread strategy makes the most sense to me.
FB Stock Trade
Sell the FB May $122 calls and buy the FB May $124 calls for a 44-cent net credit. These are the regular May monthly options that expire May 20.
Maximum gain is $44 per spread with maximum risk of $156 per spread. Return on risk is 28%.
I would cover the trade on a meaningful break to new all-time highs in FB (above $121), while looking to let the spread expire worthless and keep the initial credit if FB stock remains well behaved.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
