Option Trade 
Facebook Inc (NASDAQ:FB) Calls 
Wednesday, 27th July, 2016

** OPTION TRADE: Buy the FB OCT 21 2016 125.000 call at approximately $4.50. Place a pre-determined sell at $9.00.

Note: No protective stop losses added -- but if you wish to do so make it $1.80.

by Ian Harvey

July 27, 2016

Facebook Inc (NASDAQ: FB), which is engaged in building products to create utility for users, developers, and advertisers, is set to release its second quarter report today after the closing bell. Expectations are running high, but many analysts still believe the social network can beat them.

Wall Street expects the social network to post $6 billion in revenue and 81 cents per share in adjusted earnings for the second quarter.

In the year-earlier period, Facebook reported earnings of 50 cents and revenue of $4.04 billion, beating Wall Street estimates.

Facebook has monetized its mobile audience well and has potential future catalysts through Instagram, Oculus VR and its mobile-messaging platforms.

Facebook has continued its storied growth in Q2, with its messenger app notably hitting the 1 billion monthly user milestone on July 20th. Up until this point, messenger was not a source of revenue for Facebook, as CEO Mark Zuckerberg had previously stated that he would wait until this milestone to explore profitability options with the service.

Facebook also recently announced its first successful test of Aquila, the company’s high altitude solar-powered aircraft. Aquila is part of Facebook’s plan to beam internet to people in remote locations through use of laser communication and millimeter wave systems.

A still-growing core user base along with Instagram’s new ad program, a 1 billion user strong messenger, well-performing WhatsApp and continued innovation paints a picture of a Facebook that still has plenty of growth ahead. These factors, coupled with a lack of earnings estimate revisions in the last 60 days reflect analyst confidence in Facebook’s Q2 earnings report, as well as moving forward.

Facebook Inc stock has been on a short-term tear over the last month or so, rising more than 8% in this time, and it’s up by about 25% over the last 12 months.

Facebook has a 1-year low of $72.00 and a 1-year high of $122.20. The stock has a market cap of $346.10 billion and a price-to-earnings ratio of 74.01. The stock’s 50-day moving average is $116.19 and its 200-day moving average is $111.35.

Analysts Opinions are Positive

• Top analyst Mark Mahaney at RBC Capital weighs in on internet giant Facebook Inc head of the company’s second-quarter earnings report. The analyst reiterates an Outperform rating with a price target of $165.00.

According to the analyst, “we are expecting revenue, Non-GAAP EBIT and non-GAAP EPS of $5.99B, $3.18B and $0.80, respectively, nearly in-line with Consensus at $6.00B, $3.24B and $0.81. Note that our estimates imply 51% Y/Y (ex-FX) revenue and 59% Y/Y non-GAAP EPS growth.”

The analyst is expecting user engagement to grow 14% year-over-year, and flat advertising revenue growth. The analyst continues to recommend FB, despite material share price outperformance over the past 18 months. Mahaney sees “FB’s growth-adjusted valuation – a 15X ’17 EV/EBITDA multiple vs. almost 40% EBITDA growth – as highly attractive.” Nanigans reported positive pricing data for Facebook ads in Q2 in addition to a report that showed significant adoption and spend on Instagram.

Overall, the analyst believes that the markets underappreciate Facebook’s product innovation, usage, and user growth. In addition, he sees significant upside in monetization momentum and long-term P&L.

• Morgan Stanley analyst Brian Nowak and team believe that the two biggest trends driving Facebook Inc stock these days are engagement and monetization. He noted that the shares have only increased 2% since May and that some investors are concerned that Snapchat is taking a bite out of engagement on Facebook. He disagrees with this view; however, as his analysis of comScore data indicates that the social network is seeing strong daily active user growth in the 18 to 24 and 25 to 34 age groups.

Additionally, Facebook’s total U.S. mobile user base is growing well. Nowak said the ratio of daily to monthly active users rose about 400 basis points in the second quarter, marking the biggest increase since the first quarter of last year.

• Other sources also indicate that engagement and monetization on Facebook Inc remains strong. For example, Susquehanna analyst Shyam Patil and team report that core spending on the social network, excluding Instagram, increased by the low 20% to high 50% range during the second quarter.

The Susquehanna team also found a continuation in the ramp of Instagram monetization, adding that it seems largely incremental to ad spend on the core Facebook. They estimate that Instagram made up between 5% and 15% of ad budgets during the second quarter, compared to less than 5% in the third quarter of last year.

• James Cakmak of Monness Crespi Hardt said his research indicates there is still “robust” demand for Facebook and he expects an increase of 4% in monthly active users from the previous quarter, which would be a 15.3% increase from last year. Mobile is making up an increasing portion of Facebook’s ad revenue, and this quarter he expects mobile to make up 84% of Facebook’s advertising revenue mix.

• Rob Sanderson of MKM Partners expects Facebook revenues to be impacted 3% to 5% by currency headwinds, but expects earnings to be in-line or even beating estimates. He sees future catalysts with the presidential election and the Summer Olympics, during which time he sees Facebook and Instagram taking a large share of digital ad spending.

“We think that timing the Instagram expansion as an inflator of overall growth is the most important factor for the stock,” he wrote.

One equities research analyst has rated the stock with a sell rating, six have given a hold rating, forty-six have assigned a buy rating and two have issued a strong buy rating to the company’s stock. The company currently has a consensus rating of “Buy” and a consensus target price of $145.00.

Harvey’s Options Volatility Indicator


The Instagram ramp alone could be enough to keep investors happy in the second half of this year despite the difficult year over year comparisons for the core Facebook platform.

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

** OPTION TRADE: Buy the FB OCT 21 2016 125.000 call at approximately $4.50. Place a pre-determined sell at $9.00.

Note: No protective stop losses added -- but if you wish to do so make it $1.80.

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

Option Tip for your Success!
Options traders are not successful because they win.
Options traders win because they are successful.

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