Event: Facebook (FB) will report Q1 results tonight after the close. The options market is implying about a 4.5% one day move tomorrow which is only a tad rich to the average post-earnings move over the last 4 quarters of only 4%, but well shy of the 7.25% average one day move since its 2012 ipo.
The stock’s 32% year to date gains is nothing short of astounding, but th stock’s 10% gains since April 11th might discount any and all good news that the company could release tonight.
There is obviously NO overhead technical resistance in the stock having just made a new all-time high this morning, while the March – April consolidation between $139 and $143 might serve as healthy near-term support:
Estimates from Bloomberg:
-1Q adjusted EPS est. $1.12 (range 90c to $1.27)
-1Q revenue est. $7.83b (range $7.49b to $8.29b)
-1Q monthly active users (MAU) est. 1.91b (average of 5 estimates compiled by Bloomberg News) vs 1.86b last quarter
-1Q daily active users (DAU) est. 1.26b (5 estimates) vs 1.23b last quarterR
RBC Capital’s star internet analyst Mark Mahaney highlighted the key items to focus on in a note to clients:
1) User Growth and Engagement: FB has continued to grow users at an impressively robust pace off a very large base. In Q1, we are estimating Y/Y MAU growth of 14% to 1.89B, with a slight Q/Q increase in the DAU/MAU ratio to 66.2%, up 30bps Q/Q. 2) Advertising Revenue Growth: In Q1, FB will face a 3pt easier Y/Y Ad
2) Advertising Revenue Growth: In Q1, FB will face a 3pt easier Y/Y Ad revenue comp (ex-FX), and we are modeling a Q1:17 Ad revenue growth rate (ex-FX) of 51%.
3) Margin Levels: For Q1, we are looking for a 52.9% non-GAAP operating margin, down 240bps Y/Y. We note management has stated they will continue to invest in the platform, and 2017 will be an aggressive investment year.
I have no idea what direction the next 10% (or 2% for that matter) move in FB will be, but the stock’s recent breakout into the event makes the risk reward skewed to the downside.
For investors who are long and have enjoyed eye-popping year to date gains, you night consider a collar, selling an out of the money call and using the proceeds to buy a downside put. This strategy lets you participate in potential gains to a point but also limits your downside. For instance:
vs 100 shares of FB at $152 Buy June 160 / 145 – 135 Put Spread collar for 10 cent credit
- Sell 1 June 160 call at $1.60 and
- Buy 1 June 145 put for $2.10
- Sell 1 June 135 put at 60 cents
Break-Even on June Expiration:
Gains in the stock of up to 8 between 152 and 160
Losses in the stock of up to 7 in stock between 152 and 145, protected between 145 and 135
Rationale: The most likely outcome is the stock is up or down 5% between now and June expiration. In that scenario, you would have the gains or losses of the stock. But the put spread collar does offer the possibility of up to $10 of downside protection back to key technical support near $135. If the stock were approaching $160, the short call strike, you could cover the call and keep the long intact. The market is giving a move above 160 a 15% chance. If a 15% chance of the stock being above 160 is too tight and you see fireworks to the upside that strike can be adjusted higher (e.g. the 162.50s) for those willing to pay a bit for this trade instead of receiving a credit.
And for those looking to be long Facebook stock at its highs, we think it’s wise to define risk. One way to do that:
In lieu of 100 shares of FB (152) Buy the May5th 150/160/170 call fly for $3
- Buy 1 May5th 150 call for 4.15
- Sell 2 May5th 160 calls at .60 (1.20 total)
- Buy 1 May5th 170 call for .05
Breakeven on Friday’s expiration:
Losses of up to 3 below 153 and above 167
Gains of up to $7 between 153 and 167 with max gain of 7 at 160
Rationale – This trade targets a move higher to 160, just above the implied move, by Friday’s close. It has a good risk reward of 3 to 7. More importantly it defines risk to just $3, well less than the implied move. The main trade-off for that defined risk is that the breakeven is 153 instead of the current price of the stock at 152. The trade also acts differently than stock above 160, as profits begin to trail off. But as we said earlier, the chances of the stock being above 160 are only about 15%.