Event: FB reports their Q4 earnings after the close tonight. The options market is implying about a 11%* move following the results, which is below the 2 qtr average of 15.5%.
*With the stock trading at ~$31 the Feb1st weekly 31 straddle is trading around ~$3.35, so if you were to buy that you would need a move of at least $3.35 or ~11% by Friday’s close to break-even.
Sentiment: Wall Street analysts remain fairly optimistic on the stock with 27 Buys ratings, 12 Holds and 2 Sells, though the avg 12 month price target is only ~$34. Short interest has fallen dramatically in the past 3 months, and now sits at a mere 2.5% of the float.
Options volumes have shown an out-sized preference for calls for a month now. The 20 day average call to put ratio is around 2.0. The one week average is more skewed, around 2.6. Along with the increased call trading, open interest has shifted towards calls in the past month, moving from 1.3 calls for each put outstanding 1 month ago, to 1.55 today.
Price Action / Technicals: The technical set up in a stock like Facebook can be an valuable input given its short trading history, lack of comparable companies, and its murky fundamentals as it grapples with monetizing its massive user base. Also, you just happen to have a huge investor base that was left holding a loser after the first day of trading, and those investors have experienced the emotions of fear, total capitulation, and renewed hope in the span of less than 9 months. Let’s look at the lifetime chart:
I laid out in my post a few weeks ago my trade idea to take advantage of the 27 to 33 range in Facebook. The stock has continued to respect that range. The 33 area will be difficult to breach given how many losers in the stock are still hoping to get out for a minimal loss. Against that, the 27-28 area is significant support. It was resistance in November and December, so it likely acts as support, and the rising 50 day ma happens to be in that region as well.
Valuation / Fundamentals: Back in late Sept, Barron’s famously ran a cover story suggesting that FB shares “were still to pricey” when the stock was ~$23, citing what the secular computing shift from desktop to mobile and the risk that FB’s lacked a solid plan to monetize users on a 4 to 8 inch screen. Since the fall, the stock is up nearly 80% off of the lows as the company demonstrated better than expected results in mobile in Q3, particularly in the U.S.. Average revenue per user, or arpu, grew 22% year over year in North America, up from 11% in Q2. Investors will need to see a continuation of this trend, and a pick up in Europe (only grew 2% YoY) if the stock is to maintain its current upward momentum (approaching levels not seen since June, a month after the failed ipo. Investors also want to hear plans for other initiatives to further ring out sales from their supposed 1 billion user base.
FB shares of late have benefited from tech and growth investors who have pealed out of AAPL, now looking for the next double or triple. FB shares currently trade at 47x 2013 earnings estimates that are expected to grow 28% off of a very low base (.51 to .66) on sales of $6.5billion that are expected to grown 31% yoy. The stock is not cheap, but it is so early in the game, valuation should not be a huge focus for many investors.
Vol Snapshot: Feb1 weeklies are just above 160 vol, Feb regulars about 72 and March 52. The ATM straddle in the weeklies is about 3.35. There’s not a ton of historical vol data to go off of but the average vol across all months is just over 60 (red) and that puts it at about the average historical realized vol (peach?) in the stock:
Implied vol in Feb and March should see the low 40’s following the earnings announcement.
My View: Facebook is still too early as a company to assess it on a true stock valuation basis. Too many unknowns to say, yes, this is an appropriate price for the company. Rather, it’s the classic story stock, with everyone pitching a tale, and buying it with the thought of, what do I think other people will pay for it in a week, a month, a year. As such, it’s very beholden to trader psychology.
My view for the past month has been that Facebook is range-bound. On the plus side, the company is doing a good job in the mobile space, and continuing to implement new monetization schemes. On the negative side, the stock has rallied into previous resistance, and has a huge investor base that just wants to get out without a major loss, and move on from this roller coaster ride. Unless the company shows drastic improvements in its underlying trends, I expect the 27 to 33 range to hold. That’s where the odds are, for a trade.