Options Trade – Facebook Inc (NASDAQ:FB) Calls 
Tuesday, September 09, 2014

**OPTIONS TRADE: Buy the FB Jan 2015 85.000 call (FB150117C00085000) at or under $3.00, good for the day. Place a protective stop limit at $1.20 and a pre-determined sell at $6.00.

by Ian Harvey

September 09, 2014

Introduction

Social networking issues Facebook Inc (NASDAQ: FB) and Twitter Inc (NYSE: TWTR) are now in the limelight. Facebook Inc notched a new record high of $78.17 yesterday after the company said it will roll out YouTube-esque video features, starting this week. Against this backdrop, the stock's options volume ran at an accelerated clip, with speculators placing bets on where FB will end the week.

With just $12 billion in revenue, Facebook commands rich multiple on earnings by almost any standard.

Facebook, an information sharing application that allows ordinary American’s to post everything from pictures of themselves to news regarding their latest restaurant experience, now has a market capitalization exceeding $200 million.

Now is an opportune time to pick up FB's options contracts, as the stock's Volatility Index (VI) of 25% sits just 2 percentage points from an annual low, hinting at historically affordable premiums.

Earnings

Facebook last announced its earnings results on Wednesday, July 23rd. The company reported $0.42 EPS for the quarter, beating the Thomson Reuters consensus estimate of $0.32 by $0.10. The company had revenue of $2.90 billion for the quarter, compared to the consensus estimate of $2.80 billion.

During the same quarter in the prior year, the company posted $0.19 earnings per share. The company’s quarterly revenue was up 60.5% on a year-over-year basis. On average, analysts predict that Facebook will post $1.44 earnings per share for the current fiscal year.

Continued Growth

The company is now valued at $201.6 billion, making it the 22nd largest company in the world, ahead of Toyota Motor Corporation and just behind Verizon Communications.

When Facebook first launched into public stock trading with an initial public offering in May of 2012, the lack of revenue and the perception the stock had been significantly overpriced led to a dramatic price drop. The stock has risen significantly since that point, in part on the back of strong mobile revenue advertising gains.

Facebook shares have soared over 81 percent in the previous 12 months, much higher than the S&P 500, which had a strong year with a 21 percent increase. Facebook also have much higher capitalizations than stocks such as Oracle and International Business Machines.

In Africa

1 in 2 Internet users in Africa are accessing the world's largest social network.

While Africa had an estimated population of 1.11 billion in 2013, only around 200 million are connected to the Internet with the bulk of these users relying on feature phones or smartphones to connect. Additionally, a large percentage of that number is accounted for in a handful of countries.

That said, it’s quite impressive that Facebook Inc is now claiming that half of Africa’s connected citizens also have Facebook Inc accounts. That number is, presumably, generous as there are no doubt a number of computers in schools or Internet cafe’s servicing multiple users.

Nonetheless, Africa has 100 million Facebook users and a large number of them connect by mobile.

Diversification

Facebook has seen higher mobile revenue along with an increase in the average price paid by advertisers. The average ad price more than doubled from a year ago, even as ad impressions declined 25 percent over the same period – not a good long term sign that core usage is dropping.

For its part Facebook has been attempting to diversify its revenue stream from what could become a fickle social media market driven by what’s cool. Facebook said in February it would pay nearly $19 billion for the messaging application “WhatsApp Inc.,” but this property, like Facebook, is nowhere near generating profitability that would normally drive such a price multiple. The company also purchased virtual reality headset maker Oculus VR Inc. for nearly $2 billion. Facebook founder Marc Zuckerberg said the virtual headset will be a major communications device after mobile phones.

Video Content

Facebook, which is already a huge distributor of Internet video content, has just revealed that it delivers 1 billion video views on a daily basis. The U.S.-based company continues to consider new ways by which to become more attractive for video-content publishers.

According to the company’s statement, video views climbed by about 50% in the period from May to July 2014. More than 65% of these videos were seen on mobile devices. In an attempt to attract more video-content publishers, Facebook has now added a couple of features inspired by similar ones on YouTube.

Analysts Opinions

On the 27th August, despite rallying 39% in 2014 to trade at $75.96 at the time-- and drawing near its all-time high of $76.74 from late July -- FB saw its rating dropped to "neutral" from "buy" at Janney. As might be expected, this is a relatively rare bearish note for the Mark Zuckerberg brainchild.

The Pennsylvania based asset management company had been covering the social media website as a ‘Buy’ since last August. Tony Wible, Janney’s Media and Entertainment Analyst, had this to say about it….

“The company is going to have to work into its valuations,” Wible said referring to Facebook Inc (NASDAQ:FB)’s growth deceleration from a 60 % growth rate to 35 % growth rate. He also noted that this downward trend raised concerns about the company’s valuation in 2015. Though the growth numbers are disheartening, he put the price target at $82.50. He mentioned that this was similar to the events witnessed when Google Inc (NASDAQ:GOOGL) went public and the value of stocks seemed to stall over a period of time.

Wible mentioned that Facebook Inc (NASDAQ:FB) had tremendous growth potential in the mobile ad market. Its recent acquisitions such as Instagram will be able to put Facebook on top of the video advertising leaderboard. He also added that payments could hold the key to Facebook’s future.

“Payments is the one thing I think that is under appreciated, a lot of the other things such as search, Instagram [and]WhatsApp have been discussed ad nauseam,” he explained.

However, he was quick to note that monetary realization from payments is not something that happens overnight. Facebook will have to wait for at least a year to appreciate it payments opportunity.

Wible stated that the growth in Facebook Inc’s revenue is not being reflected in its stock price. Facebook’s previous quarter results that were announced late July beat analyst estimates. The company posted a revenue of $2.90 billion, which was higher than the market consensus of $2.80 billion. Its revenue was up by 60.5 % compared to last year. Their earnings per share were also on the higher side at $0.42 per share as opposed to the market estimate of $0.32 cents per share.

Ari Wald, head of technical analysis at Oppenheimer & Co. and Chad Morganlander, portfolio manager at Stifel Nicolaus’ Washington Crossing Advisors, recently discussed their outlook on Facebook Inc (NASDAQ:FB)’s stock.

“The call is probably for a 5 to 10% pullback and that’s what the call is and that’s no surprise. Facebook Inc (NASDAQ:FB) is as growthy of a growth stock as you can get. We do like it here at Stifel Nicolaus. We have a ‘Buy’ rating on it with a price target of roughly $90 to $95 a share, but investors have to be cautious about the volatility of the company and know what they are getting into […],” Morganlander said.

Morganlander believes that in the course of next 24 months Facebook Inc (NASDAQ:FB) is going to see a revenue growth of over 35%, which means revenues for 2015 will stand at $15 billion and for 2016 they will amount to $22 billion. He considers that Facebook Inc (NASDAQ:FB) is a kind of investment where investors need to be pragmatic and if someone is a growth investor, they ought to put a small portion of their money in Facebook Inc (NASDAQ:FB)’s stock and profit from its volatility.

“It looks good and that’s why the downgrade based on stock performance is a bit of head scratcher for me. Really a stock coming off a new high isn’t a reason to sell it, when it has got a lot of other great things going for it […],” Wald added.

The company has been the subject of a number of other research reports:-

• Analysts at RBC Capital raised their price target on shares of Facebook from $86.00 to $92.00.

• Separately, analysts at Macquarie raised their price target on shares of Facebook from $73.00 to $86.00. They now have an “outperform” rating on the stock.

• Finally, analysts at Topeka Capital Markets reiterated a “buy” rating on shares of Facebook. They now have a $80.00 price target on the stock.

Of the 33 brokerage firms covering Facebook Inc, 31 have doled out "buy" or "strong buy" endorsements, versus just two "holds."

Conclusion

Facebook Inc’s shares have been on fire lately. In the last two years to date, Facebook Inc’s stock has returned 291 percent, but many believe that it has the potential to go much higher. While the majority of analysts are very bullish on Facebook Inc, there are skeptics like Janney’s Tony Wible, who even though downgraded the stock from ‘Buy’ to ‘Neutral’, still has positive things to say about the company, as discussed above . The belief is that Facebook has a long way to go!

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE: Buy the FB Jan 2015 85.000 call (FB150117C00085000) at or under $3.00, good for the day. Place a protective stop limit at $1.20 and a pre-determined sell at $6.00.



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