Facebook Inc (NASDAQ:FB) earnings are due Feb. 1 after the market closes. Expectations are for $1.31 in earnings (the whisper number is at $1.37) with revenues of $8.5 billion. While earnings are expected to grow at 66% year-over-year, revenues are only expected to show a gain of 45% versus a year ago. Concerns over this slowing growth have tempered the recent rally in FB stock.
So unless Facebook reports blowout numbers on both the top and bottom line, I look for FB stock to struggle to head appreciably higher over the coming months.
Click to Enlarge With Facebook now the sixth largest U.S. stock by market cap, I think the law of large numbers certainly is beginning to apply. The days of heady growth percentages are a distant memory simply because of size.
To wit, 2017 shows consensus earnings growth of only 25% with expectations of $5.20 per share in earnings. This puts the forward price-earnings at a still rich 25 times earnings, a steep premium to the 17 times forward P/E for the S&P 500. Important to also remember that the S&P 500 is trading at the highest forward P/E ratio of the past 10 years, according to Yardeni Research.
Click to Enlarge Shares of Facebook are also showing some definite signs of fatigue from a technical analysis perspective. After a monster 15% straight up rally to start the year, shares of Facebook found significant resistance at the $132 level.
FB stock is also became extremely overbought on a nine-day RSI basis with a reading over 80. Previous instances when Facebook was this overbought proved to be short-term tops in FB. Interesting that the prior two overbought readings also equated to the $132 resistance level.
In my previous post on Facebook from Jan. 4, I was bullish at the $116 level based on an oversold Facebook stock. Now that FB has added on 12% in that three-week time frame, I am becoming somewhat bearish on an overbought FB.
With all but four of the 49 analysts covering Facebook having a “buy” or “strong buy” rating on Facebook, the contrarian in me feels a higher level of comfort as well.
So for those who expect Facebook to deliver anything shy of an explosive earnings report, a short call spread is a defined risk way to take bearish, or at least non-bullish, stance. With implied volatility elevated in front of earnings, the strikes can be structured further out-of-the money for a similar net credit to non-earnings weeks.
FB Stock Options
Buy the 3 Feb $139 calls and sell the 3 Feb $137 calls for a 40 cent net credit. Maximum gain on the trade is $40 per spread with maximum risk of $160 per spread. Return on risk is 25%.
The short call strike of $137 is 4.5% above the$130.98 closing price of FB. It is positioned well-above the $132 resistance area and also above the all-time intraday high of $133.50.
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.
