EVENT: FB is scheduled to report their Q3 results after the close tonight. The options market is implying a one day move in either direction for Wednesday of almost 8%, which is rich to its 4 quarter average of 5.5%, but shy of its lifetime average of about 10%. The weekly at-the-money straddle is offered at about $6, implying a break-even on Friday’s close of $74 on the downside or $86 on the upside.
Sentiment: As one would expect with FB’s 45% year-to-date gains (equaling about $80 billion in market cap), Wall Street analyst sentiment seems to mirror that of investors with 44 Buys, 9 Holds and only 1 Sell on the stock. The average 12 month price target is about $88, or 10% higher than current levels. Short interest sits at only 2% of the float.
Technicals: The 1 year chart is a work of art. It has had a fairly orderly ascent followed by periods of consolidation and then new highs. The stock’s recent volatility, from $79 to $70 and back to $80, is slightly greater than the price action of the S&P 500, whcih makes sense given the nature of the beast. To be fair, the price action in October was pretty orderly for a $200 billion market cap company that trades at 20x trailing sales.
On a near term basis, the stock could be mildly overbought heading into next week’s earnings. $70 should serve as important support, the level it gapped above following Q2 earnings in July, as well as the low from mid-October:
Volatility Snapshot: From an Implied Vol basis, options prices look fair to almost cheap when you consider that in the days following next week’s earnings, shares awarded to the owners of FB’s recently closed WhatsApp deal come unlocked and can be sold in the open market, per Bloomberg.com:
As many as 178 million shares, or 8.8 percent of Facebook’s outstanding stock, may enter the market as a lockup on stock sold during the acquisition expires, according to Goldman Sachs Group Inc. analyst Heather Bellini. The shares could become available for trading in the two or three days after Facebook reports earnings on Oct. 28, Bellini said.
The one year chart of FB’s 30 day at the money IV below shows the recent decline in options prices since last week’s broad market lows, but also the fact that options prices are below the levels of each of the last 3 earnings reports over the course of 2014:
Granted, FB is a larger company today in market cap terms than ahead of prior reports (usually dampening volatility), but the stock’s realized volatility has actually been higher in the past month compared to the summer. If FB implied volatility falls below 30 after earnings, long premium strategies will probably be a good risk/reward proposition for longer-term views.
Our View: We discussed the major outperformance by FB in Friday’s Name That Trade post:
In the large cap internet category, aside from FB, it’s just Alibaba (BABA), Netflix (NFLX) and Yahoo (YHOO) with gains in 2014, with NFLX up just 3% following last week’s one day earnings implosion to the tune of 20% and YHOO has also just eeked up some ytd gains after rallying 10% since earnings Wednesday with ytd gains now of 7%.
I guess the point here is simple, sentiment has shifted away from the more speculative smaller stocks with less proven business models, but also from some prior leaders like AMZN and GOOGL in favor of the new kids on the block like BABA and FB who have captured investor fascination.
FB’s ability to continue to monetize its mobile business will be key for investor reaction. The main thesis for FB investors is the company’s integral positioning in the shift of advertising from offline to online, and particularly to mobile. A continuation of momentum in that story will bolster the bull case, while a loss of momentum could cause some investor concerns.
Internet stocks have generally gotten hit on earnings so far in October (AMZN, NFLX, EBAY, TWTR, YELP, P, etc.), but FB stands out as the one name where sales and EPS growth have been continuing side by side. With that in mind, we don’t have a strong view for earnings this quarter, but expect FB to receive more of the benefit of the doubt in the long run compared to other internet peers.