Yesterday we previewed Facebook’s Q3 earnings due after the bell today (full post here). Here were some of Dan’s thoughts:
My Take: Expectations are not low, which has moved in lock step with the stock’s valuation. Valuation though, has been a tough determining factor to own or not own FB (and been downright wrong input to short on). There are a couple ways to think about it. The company is dominating and devouring nearly all social media and short messaging platforms, has a massive 1.5 billion person audience and growing, that will continue to be monetized (despite mobile ad rates being lower than desktop). The company will experience decelerating growth, but consensus is calling for 32% eps (adjusted) and 36% sales growth in 2016, there is not a single company with more than $50 billion market cap in the S&P 500 that can boast that (let along FB’s $290 billion market cap). On a PE/Growth, on a forward basis at 1.2x, the stock is not exactly expensive. On a price to sales ratio, FB trades at 17x current and 13x forward, vs GOOGL with a forward PE/G of 1.4 and trades 7x sales, FB a tad rich. If you are of the mindset that FB can grow sales north of 25% in an increasingly profitable manner then the current multiple is ok. But that’s a big if. With a company like FB that has grown sales from $5 billion in 2012 (the year it went public), to an expected $17 billion this year, means at some point the law of large numbers is likely to kick in. But when you consider that GOOGL is expected to grow sales this year to $60 billion, up 15% year over year, maybe there could be a lot more room to go for FB. To be fair, the stock’s $290 billion market cap, making it one of the largest market caps on the planet speaks volumes for the opportunities that lie ahead. Long term investors refuse to get off the bus in what could be the next $50 billion revenue company.
Taking a look back at Q2 results reported on July 29th, the company said that mobile ad growth rates will continue to decline, expenses are going up (op margins were down to 31% in the qtr from 48% the prior year), while daily active users came in slightly below expectations. The stock briefly sold off as investors digested what was not unexpected news. So decelerating growth is expected, but maybe more importantly investors want to hear about monetization of Instagram, which they reported in the quarter now has 400 million monthly active users, well above Twitter’s 320 million.
It appears once again, like in late July, expectations are high, sentiment remains white hot towards the stock, but investors are prepared for higher spending and decelerating growth rates. Investors seem to think the stock is in a bit of a Goldilocks period.
This makes me a tad nervous, but the recent investor crowding into growth stocks suggests the stock will be bought on weakness, as NFLX was post results.
On Friday we laid out a defensive overlay for long holders who don’t want to sell, but are willing to give up some near term upside to protect against a sharp move lower, read here.
We will offer some other trade ideas tomorrow prior to the print.
As Dan said, we already detailed a collar strategy of Friday for longs, the Nov 110c/95p (sell call, buy put). With the stock slightly higher those strikes could move up a tiny bit with the Nov 96/111 about even money here. Here are some other option trade ideas depending on your current positioning or directional inclination:
Buy the FB ($103.75) Nov 100/110/120 call fly for 3.45
Rationale – This is an excellent defined risk trade that protects against a sharp decline in the shares (in lieu of the risk of long stock here) while targeting a an upside move. The premium paid has a breakeven slightly less than where the stock is trading, meaning it’s taking advanatage of elevated implied vol into the print. The tradoff for this defined risk is that if the stock moves sharply higher on the event the profits trail off above 110 and are gone at 116.55 (where the trade actually starts to be a loser). The probability of that happening isn’t high but moves like that did happen in AMZN and GOOGL so it is possible. But chances are a realistic move higher and this trade does well, while defining risk in the event of a sell-off. The profits wouldn’t be immediately realized (similar to the TSLA fly from yesterday) but it’s a good risk reward.
Last night on CNBC’s Fast Money, Dan broke down the implied move in FB into tonight’s earnings:
I think the last point is important, that options prices are much lower heading into the Q3 report compared to where they were in late July heading into the Q2 print on July 29th. What’s interesting about this is that while the implied move of 6% seems hefty, for those willing to pick a direction, the at the money weekly calls or puts are fairly cheap relative the stock’s post earnings movement of the last 4 qtrs. For instance with the stock at $104, the Nov 6th weekly calls and puts are each offered at about $3.05, or about 3% of the stock price, and obviously half of the implied move. For those with a directional bias into the report, at the money weekly puts appear at least fair, and possibly cheap. I say that with the usual disclaimer, long premium directional trades into events are a tough way to make a living as you need to get a lot of things right to merely break-even, first and foremost direction but also the magnitude of the move.