Event: Facebook (FB) reports Q1 results tonight after the close. The options market is implying about an 8% one day move tomorrow (above last quarter’s 7% implied move), which is rich to the 4 qtr average of about 6%. I would note that following last quarter’s blow out results, the stock rallied 15.5% the following day, skewing the near term average. The 8 qtr average one day move has only been about 5%.
Price Action / Technicals: Prior to FB’s Q4 report in late Jan, the stock was trading just below $95. The stock is now up 15% from those levels, but down about 8% from its 2016 and all time highs made following their post earnings explosion in January. Unlike most of FB’s mega cap tech peers, the stock is up 2.6% in 2016.
On a near term basis, FB appears to be forming a sort of Batman head and wing pattern, and if it were to break $105, $100 would be a fairly easy target in the coming weeks:
Draw the long term uptrend anyway you like, but $100 seems to be important technical support, while the prior highs near $117 should serve as near term resistance:[caption id="attachment_63194" align="aligncenter" width="600"] From Bloomberg[/caption]
Sentiment: much like AAPL & GOOGL, Wall Street analysts are scared shitless to be off-sides on FB, with 47 Buy ratings, 4 Holds and only 1 Sell with a 12 month price target of $138ish, or nearly 30% above its current levels.
Expectations and what to watch for from RBC Capital’s Mark Mahaney:
[caption id="attachment_63195" align="aligncenter" width="555"] From RBC Capital[/caption]
Key Items to Focus On:
1) User Growth and Engagement – Facebook has continued to grow users at a reasonably robust pace off a very large base (14% Y/Y growth and 1.59B users in Q4:15). At the same time, engagement—measured by the Daily Average Users and Monthly Average Users (DAU and MAU) metrics—matched all-time highs in Q4. In Q1:16, we are estimating Y/Y MAU growth of 13% to 1.63B, with a Q/Q rise in the DAU/MAU ratio to 65.4%, 20bps above Q4:15’s record high.
2) Advertising Revenue Growth – Facebook saw ad revenue growth of 66% (ex-FX) in
Q4, 9-point acceleration on a 5-point easier comp. In Q1, FB will face a 3-point easier Y/Y Advertising revenue comp (ex-FX), and we are modeling a Q1:16 Ad revenue growth rate (ex-FX) of 62%.
3) Margin Levels – Facebook produced a strong 60% non-GAAP operating margin in Q4, despite being in an investment cycle. For Q1, we are looking for a 54% non-GAAP operating margin, up 250bps Y/Y. We note management provided non-GAAP opex guidance of 45-55% Y/Y growth in 2016 on the Q4 call, and we would expect FB to reiterate that opex growth guidance on the Q1 EPS call.
My View Into the Print: Given the massive post earnings moves lower in AAPL, GOOGL, MSFT, TWTR and NFLX it would be very easy to assume that FB is bound to a similar fate. But that would be an amateurish view. Honestly it’s a fairly treacherous near term trading set up to assume a GOOGL type move. Regular readers know that I am a long term skeptic when it comes to FB’s uncontested dominance in almost every part of its business (read here). And its earnings events and the corresponding conference calls (like tonight’s) are likely the moments to for any downshift in growth to be revealed, causing investors to rethink what they are paying for growth. But I am not sure that GOOGL or TWTR’s poor performance or commentary should be extrapolated to FB. Not yet at least. I suspect FB’s peers pain been FB’s gain, until it isn’t. Again I have no idea when we see a meaningful deceleration in growth, or some sort of competitive threat, but it will happen at some point causing investors and analysts alike to re-rate the stock. It just probably isn’t the case yet.
To be clear, and this may not be that helpful following the comments immediately above, but the stock is priced for perfection. So in-line Q1 results and commentary will likely be met with selling, prob to the tune of 5%, while slightly better than expected results will cause a relief rally, that probably finds resistance in the low teens, and it would take a meaningful beat and raise for the stock to re-test the prior highs.
We will follow up this post with one that includes options overlays for existing longs, or trade ideas for those with a directional inclination into the print.