Option Trade
Facebook Inc (NASDAQ:FB) Calls
Monday, July 24, 2017

** OPTION TRADE: Buy the FB OCT 20 2017 170.000 CALL at approximately $5.80. Place a pre-determined sell at $11.60.

Note: No protective stop losses added -- but if you wish to do so make it $2.30.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

by Ian Harvey   

Menlo Park, California-based Facebook Inc. (NASDAQ:FB), which is engaged in building products to create utility for users, developers, and advertisers, is scheduled to report its second-quarter results July 26. The company will announce its quarterly numbers after the market close, with the consensus calling for earnings of $1.13 per share, up from $0.97 during the same period last year.

The social media leader company has been growing earnings at a rapid pace, and analysts see earnings growth of 16.5% year over year for its most recent quarter. Facebook has a strong history of topping estimates, and last quarter the company posted earnings of $1.04 versus the consensus 87 cents.

The current earnings whisper number expects Facebook to report earnings of $1.22 a share, implying a 10-cent beat, which equates to a 9% earnings surprise. Facebook's strong earnings history and the current whisper number imply that a Facebook will likely crush analyst estimates once again.

Facebook is expected to post a 43% revenue spike for a quarter that saw its active user base pass 2 billion people. CEO Mark Zuckerberg and his team will likely highlight Facebook's success at monetizing its massive user base. At the last check in, average revenue per user leapt to over $17 in the U.S. market from $12 a year ago.

Management is optimistic that video content will make the site both more engaging for users and extra valuable for advertisers. At the same time, Facebook's other huge platforms, including Messenger, might begin generating meaningful revenue as the company slowly introduces ads to the services.

FB shares have gained 41.0% on the year.

Facebook has a market capitalization of $476.55 billion, a P/E ratio of 41.81 and a beta of 0.67. Facebook has a 52-week low of $113.55 and a 52-week high of $165.70. The company’s 50-day moving average price is $153.80 and its 200-day moving average price is $142.68.

Influencing Factors to Consider

Backed by a solid history of trumping analyst estimates, strong topline/earnings momentum, Facebook stock has been climbing higher as we head into the upcoming earnings report. FB stock has climbed steadily through the year, closing the last trading session at a price of $164.43 a share, very close to its all-time highs around $165, which were also reached in the last week.

Facebook has a stellar track record as far as beating earnings estimates is concerned. The company has beaten/met analyst estimates in 19 out of the 20 reported quarters since the company went public in 2012. Facebook has delivered an average earnings surprise of 7.8% over this period. Looking at the more recent earnings history, Facebook has crushed Wall Street consensus in the last 4 quarters. Not only has the company delivered an earnings surprise, but it has also met/beaten the high end of Wall Street estimates in each of the last 4 quarters. Given the recent earnings history, Facebook will likely report at/above the high end of Wall Street estimates, which at $1.21, and would represent a 9 cent beat.

A top pick for S&P Global portfolio manager Erin Gibbs is Facebook which has a strong history of surpassing analysts' earnings estimates, she said, and is now trading at a relatively reasonable valuation.

This comes during a period in which analysts are not currently forecasting a substantial amount of growth over the next few months.

"This period of temporary lowered outlook and lowered valuations seems like a decent place to get in before [Facebook] starts showing Wall Street they have underestimated one of the better-managed companies in tech," she wrote Tuesday.

Furthermore, "Valuation has come down to reasonable levels, at 32 [times] forward earnings, given the lowered growth estimate for the next 12 months." The estimate for earnings per share over the next 12 months "is only 3% growth, which sets the bar fairly low."

According to S&P Global, Facebook has beaten earnings expectations handily over the last year and a half; earnings before taxes have surprised by 17 percent, 11 percent, 9 percent and nearly 5 percent over the last four fiscal quarters.

Analysts and Hedge Funds Opinions

Facebook, Inc.‘s stock had its “outperform” rating reiterated by investment analysts at Robert W. Baird in a report issued on Monday, July 3rd.

Several other analysts have also recently commented on the company…..

  • Instinet restated a “buy” rating on shares of Facebook in a report on Saturday, March 25th.
  • BTIG Research upgraded shares of Facebook from a “neutral” rating to a “buy” rating and increased their price target for the stock from $139.94 to $175.00 in a research note on Tuesday, March 21st.
  •  UBS AG increased their price target on shares of Facebook from $155.00 to $165.00 and gave the stock a “buy” rating in a research note on Friday, March 17th.
  • Aegis reiterated a “buy” rating on shares of Facebook in a research note on Wednesday, March 15th. Finally, Jefferies Group LLC reiterated a “buy” rating and issued a $175.00 price target on shares of Facebook in a research note on Wednesday, April 19th.

One analyst has rated the stock with a sell rating, six have assigned a hold rating, forty-one have assigned a buy rating and four have assigned a strong buy rating to the stock. The company presently has an average rating of “Buy” and an average target price of $170.00.

Harvey’s Options Volatility Indicator


Last quarter the company reported 1.94 billion monthly active users, and that number should eclipse the 2 billion mark during Q2.

Facebook has proven a strong ability to monetize its mobile users, which now account for roughly 85% of the company’s total advertising revenue.

Facebook is a company on fire, and barring any huge negative surprises the stock should build on its recent gains.

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

** OPTION TRADE: Buy the FB OCT 20 2017 170.000 CALL at approximately $5.80. Place a pre-determined sell at $11.60.

Note: No protective stop losses added -- but if you wish to do so make it $2.30.


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