Option Trade 
Facebook Inc (NASDAQ:FB) Calls 
Tuesday, 9th August, 2016

** OPTION TRADE: Buy the FB OCT 21 2016 130.000 call at approximately $2.60. Place a pre-determined sell at $5.00.

Note: No protective stop losses added -- but if you wish to do so make it $1.05.

by Ian Harvey

August 09, 2016

Facebook Inc (NASDAQ: FB), which is engaged in building products to create utility for users, developers, and advertisers, has a lot more room to run. Once again, the social media giant proved its control of the industry with an impressive earnings beat, backed by solid mobile advertising growth. Billions of dollars in profit, triple-digit net income growth, and a rapidly growing user base -- Facebook is firing on all cylinders.

On the back of yet another expectation-crushing quarter, Facebook stock year-to-date gain is now up 18.4%.

Who would have guessed when Facebook stock went public in May 2012 at $38 a share that the stock would be trading at $124 just over four years later! After all, the stock's $100 billion market capitalization when it went public was criticized by many as overvalued. But between its $38 share price and its $124 price today, Facebook has posted lots of quarters of huge growth -- quarters like the second quarter it announced recently.

Once again, the social network didn't disappoint when it reported quarterly results.

As usual, Facebook's second-quarter revenue came in well ahead of analyst estimates. The company reported revenue of $6.44 billion, obliterating analysts' consensus estimate for revenue of $6.02 billion. Further, Facebook's year-over-year revenue growth for the quarter actually accelerated compared to growth in the prior quarter. In the first quarter of 2016, Facebook's year-over-year revenue growth rate was 52%.

With Facebook's revenue soaring faster than its expenses, the social network's earnings benefited from operating leverage. Net income soared 186% to more than $2 billion, and non-GAAP EPS jumped 94%.

Rising profits were similarly evident in the company's closely watched non-GAAP EPS metric. As a result of Facebook's faster-than-expected revenue growth, the social network was able to handily beat the consensus analyst estimate for non-GAAP EPS. Facebook reported non-GAAP EPS of $0.94 -- above analyst estimates for $0.82.

Facebook's size certainly isn't slowing it down. Facebook's large user base is still growing rapidly -- despite the fact that about one in seven people already use the platform every day. In Q2, Facebook's monthly active users hit 1.71 billion -- up 15% year over year and up 3.5% sequentially.

The stock has a 50-day moving average of $117.55 and a 200-day moving average of $112.87. The stock has a market capitalization of $356.59 billion and a PE ratio of 59.3575. Facebook has a one year low of $72.00 and a one year high of $128.33.

Why Facebook?

Facebook Inc is the only leading tech firm to have a zero debt-to-equity ratio. This firm also has the lowest short ratio among the above six large-cap tech stocks. Facebook’s 27.1% net profit margin and 39.6% operating margin are by far the highest among the six big tech firms. Facebook’s 32.2% capital appreciation over the past 12 months was the highest among these firms, but its 4.84% climb during 2Q2016 was the lowest. The 59.48 price-to-earnings ratio shows that Facebook is coveted much more than the other six tech stocks. This recent lull in capital appreciation may be an opportune time to consider investing before more bullish traders join in.

As of 2Q2016, Facebook stock has only missed exceeding analysts’ expectations one of 18 times since the date of its IPO. Total revenue increased by 59% year-over-year to $6.44 billion, while Facebook’s net income still totaled $2.05 billion.

The social network’s userbase continues to experience strong growth. More importantly, the majority of this success is being driven by emerging markets outside of the U.S. More than 85% of Facebook’s 1.7 million monthly active users (MAUs) in 2Q2016 were actually located outside of North America, with more than one billion coming from Asia and places outside of Europe.

Analyst Input

After Facebook blew away expectations yet again, analysts were left scrambling to adjust their estimates for the remainder of the year. Since the release of Facebook’s earnings report, analysts across the board are becoming even more bullish on Facebook stock, the company has seen eight positive estimate revisions for its current-quarter, next-quarter, and full-year earnings.

Facebook Inc. has been assigned a $170.00 price target by analysts at Jefferies Group in a note issued to investors last Thursday. The firm currently has a “buy” rating on the social networking company’s stock. Jefferies Group’s price target indicates a potential upside of 38.76% from the company’s current price.

Also, several other equities research analysts have recently commented on the company.

• Pacific Crest reiterated a “sector perform” rating on shares of Facebook in a report on Friday, July 29th.

• Zacks Investment Research upgraded Facebook from a “hold” rating to a “strong-buy” rating and set a $144.00 target price for the company in a report on Friday, July 29th.

• MKM Partners increased their target price on Facebook from $150.00 to $165.00 and gave the stock a “buy” rating in a report on Monday.

• Bank of America Corp. reiterated a “buy” rating and set a $153.07 target price (up previously from $123.94) on shares of Facebook in a report on Monday.

• Finally, Citigroup Inc. increased their target price on Facebook from $141.00 to $148.00 and gave the stock a “buy” rating in a report on Thursday, July 28th.

One investment analyst has rated the stock with a sell rating, five have given a hold rating, forty-six have issued a buy rating and three have given a strong buy rating to the company’s stock. Facebook presently has an average rating of “Buy” and a consensus price target of $146.99.

Harvey’s Options Volatility Indicator


Facebook's ability to continue to increase its daily active user count as rapidly as it has is astounding. This trend is particularly impressive because its daily active users have generally increased at a faster rate than its monthly active users, meaning Facebook's engagement rate, or the percentage of total monthly active users using the platform every day, is increasing. In Q2, the company's engagement rate was 66% -- up from 65% in the same quarter last year and 63% in the same quarter two years ago.

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 130.000 call at approximately $2.60. Place a pre-determined sell at $5.00.

Note: No protective stop losses added -- but if you wish to do so make it $1.05.

”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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