Don’t Just Like this Monster Facebook, Inc. Earnings Report, Love It
The stock market has been turbulent since the highs of January. On February 2nd investors panicked over rising interest rate concerns. However the concerns have since grown in scope to include a wide array of topics. Most concerning were tariff war threats between the United States and China and some to Europe and Russia.
So the stock market corrected sharply and we’ve yet to recover the highs since. So the fears are real and are still ongoing even if the headlines have diminished. But Facebook, Inc. (NASDAQ:FB) has had its own set of issues.
FB stock lost over 20% in March over an embarrassing story of data misuse. The media erroneously labeled it as a “breach.” There was no a actual encroachment on data sovereignty but rather a misuse of data by a third party provider. So FB did not directly commit any breaches of contract but nevertheless it happened on their platforms.
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FB stock has had a slight bounce up to $159 per share going into its earnings last night. And therein lies my bullish thesis on Facebook stock.
This morning the stock is spiking on the headline. Management delivered a monster quarter! They beat on all metrics and raised guidance, which is critical these days for investors to see. More importantly, they added an extra $9 billion worth of new buybacks in addition to the ones already in place. These are not actions of a team that is worried about rising expenses or regulations.
Consensus from Wall Street has been that after such a “breach,” surely regulators will have to step in and regulate, which would be costly for companies like it and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL). It is my opinion that Facebook will come out of this even stronger than before because of the company’s reach — and it is gigantic.
From personal experience, I know that most international users are not focused on this Cambridge Analytica situation. It has been a U.S.-centric headline. And even then, we have 200 million U.S. users who may or may not be concerned over who knows what about them.
Bears would argue that a good chunk of advertises are in the U.S. To that I say that the eyeballs are outside and that the advertising money will follow the eyeballs. The Facebook CFO addressed the issue by saying that there was a slight pause by some advertisers when the news broke out but that they have since resumed as normal.
This is a long way of saying this too shall pass for Facebook stock.
Fundamentally, FB sells at a cheap price-to-earnings ratio for growth company. They are a cash cow and they have been completely discounted by one headline. I’m a fundamental investor, and these are the opportunities that I seek. I’m lucky enough to be long FB into earnings, and here is how I add to my bullish exposure.
I recognize that these are fickle markets so I won’t risk $170 to buy more shares outright. Instead I sell downside risk against what others fear to generate income out of thin air. This potentially lowers my entry cost in my existing longs in FB.
If I’m wrong and the price falls below my risk then I own more shares of Facebook at an even bigger discount than now. I am confident that I will manage those shares to profitability over time.
Facebook Stock Trade Ideas
The Trade: Sell the FB DEC $130 put for $3. Here I have a 80% theoretical chance of success. Otherwise and if the price falls below that level, then I would suffer losses below $127.
Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the FB DEC $135/$130 credit put spread, where I have about the same odds of winning but with much smaller risk. Yet the spread would yield 15% if successful.
There are no guarantees when investing in stocks, so I never risk more than I can afford to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
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