Facebook Inc (NASDAQ:FB) stock is in the midst of a shakeup this morning. The company announced that it was making major changes to its news feed. Analysts are concerned the changes will impact ad revenue. However, I believe that this is not only the right move morally for the company, it will also pay off in the long run for Facebook stock.
Specifically, Facebook said that it was making changes to prioritize news feed posts from friends and family, meaning businesses and publishers will take a backseat. Facebook CEO Mark Zuckerberg said the change was designed to prioritize “meaningful social interactions” versus “relevant content.”
The move appears to mark a shift for the company, which has come under fire for propagating fake news. Furthermore, former VP Chamath Palihapitiya recently expressed his “tremendous guilt” regarding Facebook’s rise in popularity. Palihapitiya feels this eroded “the core foundations of how people behave by and between each other.”
Click to Enlarge Zuckerberg’s shift toward friends and family appears to be a step toward resolving both issues.
Facebook stock, however, is taking a considerable hit this morning on the news. The shares are down nearly 5% in premarket trading. Analysts and investors worry that the new news feed format will mean less ad revenue for the company, with users spending less time on Facebook as a result.
There is a flaw in this logic, however. It assumes that Facebook users were visiting the site mainly to see new publisher content and communications from businesses. Remember, Facebook initially rose to prominence due to family and friend interactions … not publisher content.
So, while direct publisher and business revenue may falter a bit, ad revenue shouldn’t be impacted all that much. In fact, this move could bring more users back to Facebook.
What’s more, some analysts are already viewing the move as positive. GBH Insights raised its price target on Facebook shares to $225 from $210. Suntrust Robinson also raised its price target to $240 from $215. Currently, the average consensus price target rests at $210.95.
Today’s drop in Facebook stock does have a direct impact for options traders, however. Traders who got into last month’s Jan 2018 $185/$190 bull call spread will see their profit evaporate on the open this morning. Taking the entry price of $1.46 per pair of contracts, traders were sitting on a profit of $1.26, or about 88%, with FB stock well on its way to challenging $190.
FB opened south of $180 this morning. While this doesn’t mean the Jan 2018 $185/$190 spread is busted, it does make things a bit more complicated heading into next week’s expiration.
The January 2018 $170 put sell trade, however, remains in excellent shape.
But Facebook stock’s drop today is still a bullish opportunity for investors and traders. Once the knee-jerk reaction is out of the way, FB stock is sure to rebound and resume its longer-term uptrend.
Adjusting our target to February, implieds are pricing in a potential move of about a 7% move for Facebook stock ahead of expiration. This places the upper bound at about $193, while the lower bound lies at $165.
Traders should know that Facebook is expected to report earnings after the close on Jan. 31 — adding volatility to February options. Analysts are currently expecting a profit of $1.94 per share on revenue of $12.48 billion. Guidance related to the change in the news feed will be key for this report.
2 Trades for Facebook Stock
Call Spread: Despite today’s announcement, I contend that Facebook stock will rebound once the initial reaction is out of the way. This makes today’s weakness a bullish opportunity. Traders looking to take advantage of this pullback amid a longer-term rally might want to consider a February $185/$190 bull call spread has considerable potential.
At last check, this spread was offered at $1.62, or $162 per pair of contracts. Breakeven lies at $186.62, while a maximum profit of $3.38, or $338 per pair of contracts — a potential 108% return — is possible if FB stock closes at or above $190 when February options expire.
Put Sell: Sticking with last month’s theme, neutral-to-bullish traders might consider a Feb $170 put. This put was last bid at $3.20, or $3.20 per contract.
As long as Facebook stock trades above $170 through expiration, traders pursuing this strategy will keep the $320 premium. However, if FB trades below $170 ahead of expiration, you could be assigned 100 shares for each contract sold at a price of $170 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.