Option Trade 
Facebook Inc (NASDAQ:FB) Calls 
Monday, July 27, 2015

**OPTION TRADE: Buy the FB Sep 2015 100.000 call (FB150918C00100000) at approximately $4.00. Place a protective stop loss at $1.60, and a pre-determined sell at $8.00.

by Ian Harvey

July 27, 2015


Facebook Inc (NASDAQ: FB), a social networking website company, is firing on all cylinders lately, rising by more than 40% over the last year on the back of booming financial performance and growing optimism among investors, and in this month alone, has climbed more than 13%. The company is scheduled to report earnings for the second quarter of 2015 on Wednesday, July 29, after the close of markets.

Facebook is a growth business, and Wall Street is expecting sustained top-line expansion from the company. Analysts estimate that the company will post $0.47 earnings per share on $3.97 billion in revenue, marking potential year-over-year increases of 12% and 35%, respectively.

Wall Street analysts estimate on average that Facebook will make $0.47 in earnings per share during the quarter, which implies a year-over-year growth rate of 12% from the second quarter in 2014. It's worth noting that earnings forecasts are quite dispersed, though -- the most optimistic estimate is for $0.59, while the lowest estimate among Wall Street analysts is for $0.39. This means that estimates go as far 26% above and 17% below the average forecast.

Technical Details

Shares of Facebook closed at 96.95 on Friday.

Facebook has a 52 week low of $70.32 and a 52 week high of $99.24.

The stock has a 50-day moving average of $87.33 and a 200-day moving average of $81.42.

The company has a market cap of $272.26 billion and a price-to-earnings ratio of 93.85.


Previous Earnings

Facebook last issued its quarterly earnings data on Wednesday, April 22nd. The social networking company reported $0.42 EPS for the quarter, beating the Thomson Reuters consensus estimate of $0.40 by $0.02. The company had revenue of $3.54 billion for the quarter.

During the same quarter in the prior year, the company posted $0.34 earnings per share. The company’s quarterly revenue was up 41.6% on a year-over-year basis. On average, analysts predict that Facebook will post $2.00 earnings per share for the current fiscal year.

Future Earnings

The second-quarter forecast for this social media colossus calls for EPS that climbed from $0.42 in the year-ago period to $0.49. However, revenues for the three months that ended in June are expected to have jumped more than 37 percent to $4.03 billion, according to 241 estimates.

So far, Wall Street analysts are looking for both sequential and year-over-year growth on the top and bottom lines for the current period. But the analysts have underestimated EPS in the past four periods by as much as a dime, or about 31 percent.

Why Facebook?

Total revenue during the first quarter in 2015 grew 42%, while sales in constant currency increased by a staggering 49%. Besides, keeping revenue growth at over 35% per year is still spectacular performance for a business making nearly $17 billion in annual revenue.

Mobile advertising revenue represented approximately 73% of advertising revenue for the first quarter of 2015, up from nearly 59% of advertising revenue coming from mobile in the first quarter of 2014.

As of the first quarter of 2015, Facebook had 1.44 billion monthly active accounts, a year-over-year increase of 13%. Daily active users stood at 936 million, growing 17% year over year during the last quarter. The fact that daily users are growing at a faster rate than monthly ones is a big positive for Facebook, as it reflects healthy engagement trends.

The company is also doing great in mobile; Facebook had 1.25 billion mobile monthly users as of the last quarter, growing 24% year over year. Daily mobile users were 798 million, expanding by 31% from the first quarter in 2014.

Not only that, Facebook is also consolidating its presence across different platforms. WhatsApp has over 700 million users, and Instagram has more than 300 million active members. Services such as Facebook Groups and Messenger are also important when it comes to cementing Facebook's relationship with users and keeping those users dynamically engaged. As of March, Facebook Groups had 700 million users and Messenger was above 600 million accounts.

Other Significant Positives

• Last week, Facebook became the fastest Standard & Poor’s 500 Index component to breach a $250 billion market cap.

• As the social media leader continues to grow its brands and expand its reach, “smart money” investors are piling into Facebook stock.

• According to Forbes, Facebook is among the top 20 tech stocks that the richest fund billionaires are buying right now. Stanley Druckenmiller, Steve Cohen, and Daniel Och are among the billionaires recently increasing their stake in FB stock.

• Among the 50 largest hedge funds, 22 hold shares in Facebook, according to FactSet. That makes Facebook a top 50 holding among the top 50 hedge funds.

• The mobile ad market, growing at blazing speeds, is expected to be worth $41.9 billion by 2017, according to Gartner. And Facebook continues to take market share in the space.

• Facebook is the dominant service on mobile. Between its flagship app and Instagram, Facebook says it accounts for 20% of time spent on mobile devices.

Analysts Opinions

Rosenblatt Securities reiterated their buy rating on shares of Facebook (NASDAQ:FB) in a research report released last Wednesday morning.

In a recent sell-side report, Bernstein gave its earnings preview for Facebook Inc. second-quarter fiscal year 2015 results. The report has observed that based on the increase in stock price, Facebook has emerged as the most loved stock for investors. Bernstein has rated the social networking platform as Market-Perform, with a price target of $84.

In a research note published last Tuesday, Oppenheimer reiterated an Outperform rating on the stock along with a price target of $100.

Oppenheimer foresees a strong second-quarter by Facebook driven by higher mobile engagement, solid monetization and the continued roll-out of video ads. The checks suggest better 2QFY15 sequential trends compared to last year, driven by improved targeting, native content and multiple ad formats.

The firm also noted that foreign exchange (FX) movements suggest a negative impact of approximately 9% to quarterly revenue, consistent with the firm’s model. However, the firm believes that deeper ad-tech stack, Facebook Audience Network (FAN) and Video could provide significant upside to the estimates. Moreover, new click definitions for CPC’s, video ads priced after 10 seconds, and roll-out of the Instagram platform to all advertisers could prove meaningful drivers for the quarter.

Last Tuesday, Merrill Lynch analysts added the stock to its list of top investment ideas, US list 1, and also outlined positive comments on Facebook in light of the social network giant’s growing user base and increasing traction of its newer platform.

The firm said:

“We continue to rate Facebook as a top idea in Internet given mobile exposure and growing time share in the category, improving ad targeting, video traction, Instagram ad ramp and growth of new platforms. Checks suggest positive trends in 3Q, and we see upside to our revenue estimate with improving ad targeting, video and Instagram.”

Furthermore, the analysts pointed out a number of potential upside revenue drivers for Facebook. These include: 1) Benefit from the introduction of new ad formats and changes in ad formats such as carousel ads and a Buy Button, 2) Success in video usage on ad pricing, and 3) New ads on instagram. They also said that Facebook’s valuation at 37x their 2016 EPS estimate appears to be attractive versus peers.

Talking about the company’s other platforms, analysts commented that they are positive on solid growth and long term potential of Facebook’s other apps.

Merrill Lynch maintained a Buy rating with a $105 price objective on Facebook shares.

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

• Analysts at Robert W. Baird reiterated an “outperform” rating on shares of Facebook in a research note on Wednesday, July 22nd.

• Analysts at Bank of America upgraded shares of Facebook to a “focus list” rating in a research note on Wednesday, July 22nd.

• Finally, analysts at Nomura raised their price target on shares of Facebook from $96.00 to $115.00 and gave the company a “buy” rating in a research note on Tuesday, July 21st.

Two equities research analysts have rated the stock with a sell rating, four have given a hold rating, forty-two have given a buy rating and one has given a strong buy rating to the stock. Facebook has a consensus rating of “Buy” and an average target price of $96.78.


Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

**OPTION TRADE: Buy the FB Sep 2015 100.000 call (FB150918C00100000) at approximately $4.00. Place a protective stop loss at $1.60, and a pre-determined sell at $8.00.

”Success is simple. Do what's right, the right way, at the right time.”

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Options traders are not successful because they win.
Options traders win because they are successful.

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