New Trade $FB – Is Anyone Home?

by Dan May 1, 2013 2:39 pm • Commentary

On Monday we previewed FB’s Q1 earnings report (below) and while the story remains fairly controversial, we believe that the likelihood of any resolutions to some of the longer-term questions regarding the company’s future will not manifest themselves in tonight’s report or in their guidance.  At this stage of the Q1 earnings cycle, there have been plenty of data-points that have been gleaned from their competitors and/or customers that lead us to think that we will see few surprises, which leads us to be inclined to fade what is a fairly hefty implied move following the print (~8.5%, the May 27.50 straddle is offered at ~$2.35, if you bought that you would need about an 8.5% in either direction by Friday’s close to make money).  

Trade: FB ($27.50) Sold  May 3rd weekly 26/25  – 28.50/29.50 Iron Condor @ .58

Sold May3rd 26/25 Put Spread at .24

-Sold 1 May3rd 26 Put at .48

-Bought 1 May3rd 25 Put for .24

Sold May3rd 28.50/29.50 Call Spread at .34

-Sold 1 May 28.50 Call at .74

-Bought 1 May 29.50 for .40

Break-Even on May3rd Expiration (Friday):

-Profits of up to .58 btwn 25.42 and 29.08, with max gain of .58 below 28.50 and above 26

-Losses of up to .42 btwn 25 and 25.42 & btwn 29.08 and 29.50

Trade Rationale:  With 1.75 billion shares outstanding, and institutions and retail investors with little if any profits in the stock since their IPO a year ago, I am hard pressed to see who the incremental buyer is at $27.50 without a dramatic beat and raise.  That being said, If I am long this stock (which I am not) and believe in the story, one blip on a quarterly report is not likely to cause me to dump the shares here.  So my conclusion that the stock could remain range bound bwtn 25 and 30 following tonight’s print.

This trade structure offers a defined risk way to play for less than expected movement. Since this is a weekly option trade with earnings just one trading day before expiration this is a fairly binary trade. It is very possible that the trade loses all 42c that it is risking or expires worthless for the 58c credit in profits.

Disclaimer: this sort of options trade structure takes a bit of concentration to execute and one would want to do this as a package, not as individual legs.  A trader is far more likely to get better pricing, without paying full bid ask as a package than by trading the legs individually.



Original Post Apr 29, 2013:   $FB Q1 Earnings Preview

Event:  FB will report their Q1 earnings after the close on Wednesday May 1st.  The options market is implying about a 8.5% move vs the 3 qtr avg of about 10.5% (the May 3rd weekly straddle is offered at about 2.35 vs stock at ~$27, if you bought that you would need a move of at least 2.35 or about 8.5% to break-even on Friday’s close).

Sentiment:  Wall Street analysts remain fairly positive on the stock with 25 Buys, 14 Holds and 3 Sells with any avg 12 month price target of about $33.60, or ~23% higher than current levels.  Short interest sits at about 2.25% of the float.

The put/call ratio for existing open interest sits at about .85 with the largest single lines of OI:  Jan14 25 puts – 102k, Jan14 20 puts ~75k, May 22 puts ~55k, May 25 puts ~45k, Jun 30 calls ~40k, Jan14 30 calls ~ 40k & May 30 calls ~37k.

Price Action:  FB has been a fairly large under-performer ytd vs the broad market, but interestingly there is a fairly large divergence btwn internet stocks in 2013.  FB’s 2% gains on the year resemble those of mature e-comerce names AMZN & EBAY, while stocks like LNKD & NFLX are enjoying massive gains given their potential earnings leverage off of a low base, YHOO’s gains related to their sum of the parts and their potential turnaround, and then that of  GOOG which can be attributed to just firing on all cylinders.

Technicals:  The one year chart (the only one that exists!) has been a tale of 2 cities so to speak, neither city that enticing though.  The trend-line off of the highs on ipo day and the trend-line off of the lows this past Sept appear to be converging, with the stock at a bit of a crossroads.  $25 has served as fairly staunch support dating back to late last year, while $30 appears to be healthy resistance.

FB 1 Yr chart from Bloomberg
FB 1 Yr chart from Bloomberg

The lack of interest in the name since February is shown by the low volume in the lower panel.  If the stock does break up (above $28) or down (below $25) from here, one sign of the sustainability of that break will be whether volume picks up significantly.  For now, the charts show apathy.

Fundamentals/Valuation:   We can start by saying throw any  discussion about buying or selling FB shares based soley on valuation right out the door, it really doesn’t matter.  The buyers of the hundreds of millions of shares on last year’s highly anticipated IPO could have cared less about such silly things, so why should you now.  The FB story is fairly simple to me, the company is more mature than most tech investors who get used to paying lofty multiples for high growth tech companies, the real question for this company is not how to get to mass adoption (they have done that), the question is how to make money on them.  The answer though is not that simple, I can think of many great useful internet utilities that were bought by larger more established players who were never able to monetize them (think instant message, portals and most other social media services).

So the whole investment world wants to know how quickly they can show progress migrating advertisers to their mobile platform and then actually get their users to view them.  Back in Feb when FB reported their Q4, the company missed revenue estimates by about 12% as analysts and investors alike were left scratching their heads as to the growth rates and the % of overall ad sales for mobile.

IN a quarterly preview note to clients, GS, who rates the stock a Buy with a 12 month $40 price target had the following to say:

Overall we see an in line to slightly ahead of expectations quarter given our feedback from industry contacts despite the macro backdrop. We are modeling total ad revenue of $1.25bn (+43% yoy and -6% qoq), in line with consensus, while we are forecasting payment revenue of $200mn (+8% yoy and -22% qoq) versus the Street at $193mn. We are modeling mobile ad revenue of $382mn, up 25% qoq and representing 31% of total ad revenue for 1Q13, up from 23% of ad revenue, or roughly $305mn, last quarter. This compares to consensus of roughly $340mn in 1Q13 mobile revenue, up 11% qoq and representing 27% of the total. That said, we believe investor expectations for March quarter mobile revenue currently stand in the $320-330mn range. Overall our contacts reported mobile spend with Facebook was up meaningfully sequentially and we remain comfortable that mobile results will come in ahead of consensus

Vol Snapshot:  Having gone public less than a year ago, there’s not a long history of FB options to study, but the implied volatility isn’t that high  compared to it’s recent earnings releases.  Here’s a look at the past year with Implied in red and realized in blue:

Screen Shot 2013-04-29 at 11.21.06 AM
from LiveVol Pro

May regulars are about 50 vol and June about 37. Both will probably fall to the low to mid 30’s following the report.

My View:  First things first, as many readers know, I am not a  fan of FB’s main product (not a user, nor will I ever be), their management, and their potential for rapid monetization of their supposed billion users.   Ask the kids today what social media services they are using, more and more the answers are micro services like Instagram (yes i know FB bought them), Twitter, WhatsApp etc.  I read somewhere recently that 80% of adult Americans have FB accounts, I suggest this number will continue to decrease as the youths move to cooler platforms and old people do what they do best, get cranky and annoyed with all the ads and intrusive crap on the site.  There are obviously tremendous growth opportunities to add users in emerging markets, but if they can’t get users in the Western World to pay for services or click on ads how the heck do they expect to do so in places like China and India.

As for the quarter, barring a material beat and raise quarter that gives investors greater visibility into FB’s ability to monetize mobile users, I fear that the stock could be stuck in this $25 to $30 sort of range if the results appear to be in line with expectations.  Given results in Q1 from GOOG and other ad related businesses it would be slightly surprising to see a material miss in sales of greater than 10% (similar to last quarter.  We are looking at some trades that would essentially fade the implied move and take advantage of elevated implied volatility into the print.  Stay tuned.