When talking about Facebook Inc’s (NASDAQ:FB) security investments during the company’s earnings conference call last night, CEO Mark Zuckerburg stated that “it will significantly impact our profitability going forward.” This wiped a big after-hours spike in FB stock.
After setting a new high in after hours trading, the stock flipped red. Investors loved the metrics, but hated the guidance comments on spending, as management told us that they will be spending much more than anticipated.
What’s Going on With FB Stock?
This is in response to political pressures stemming from the Russian advertising issue. Basically they will hire thousands of people to manually review ads and investigate who is paying for them. I personally dislike this idea very much.
I don’t blame sellers for leaving it. Long-term, I am sure that the platform will be better for it, but for now, traders prefer to book profits.
Some falling knives are easier to catch than others. FB is a great company with tremendous value. I have no problems betting long on it. Besides, the dip this morning is not that big, which substantiates its value. Otherwise the selling would have been more severe.
Fundamentally, FB stock is not obviously cheap with a price-to-earnings ratio of 40X. But it’s not bloated either. Even then, it deserves the higher valuation since it has better growth and margins than most of its competitors. Its user metrics are astonishing. Some argue that this is approaching topping levels, but they have other platforms that are still relative infants.
This is a company that has the attention of billions of users daily and for hours at a time. It will be a long-term winner. Management has proven itself capable of pulling off great acquisitions. I anticipate this to continue.
Video will be a big contributor in the future. Along with Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), Apple Inc. (NASDAQ:AAPL) and Walt Disney Co (NYSE:DIS), FB will eat into Netflix, Inc.’s (NASDAQ:NFLX) profits in the coming years.
My bet today is that investors will buy every dip in Facebook stock. So today I will set a bullish trade, but one that doesn’t need a rally to win.
Technically, coming into its earnings, FB stock was up 60% year-to-date, 6% of which came in the last three days. So a small dip on earnings is normal and definitely will not change the bullish thesis. The stock can fall to $172-per-share and stay within the channel. There prior resistance should become forward support. In case that happens and fails, FB still has room at $164, where it would become even more attractive to “buy-the-dippers.”
Bottom Line of Facebook Stock
The Trade: Sell the FB Feb 2018 $150 put and collect $2-per-contract to open. I have a 85% theoretical certainty, so that I retain maximum gains. Otherwise, I will accumulate losses below $148.
Selling naked puts is daunting especially near all-time high stock markets. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the FB Feb 2018 $150/$145 credit put spread. The spread has the same odds, but would deliver 15% yield on risk. Neither trade requires a rally to profit. In fact, the stock can fall an additional 18% and I could still retain maximum gains.
As you can see in today’s trade, although it would benefit from one, it doesn’t need a rally to profit. I merely need FB stock to hold its support for the next few months. I am betting that the value in the stock will prevent sellers from taking it down too far. It is important to know that if they do, then I want to own the shares at a discount from here.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Get my newsletter for free here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.”
