Trade Ideas April 29, 2020

Facebook (FB) Q1 Earnings Preview

by Dan

Facebook (FB) will report its Q1 results today after the close. The options market is implying about a $12 or 6% move in either direction tomorrow, which is rich to the 4% average one-day post-earnings move over the last four quarters.

Shares of FB are down about 5% on the year, aided by today’s 6% gain on the heels of GOOGL’s better than expected results last night. The stock is quickly approaching the nice round number of $200, a technical level that could serve as near term resistance:

It is worth noting FB’s all-time came on the day of their Q4 earnings report on January 29th near $224, which saw the stock decline 6% the next day and started what would be a nearly 40% peak to trough decline to its March lows. Investors were unhappy with FB’s costs going up while revenue growth was decelerating, I am hard-pressed to see that trend reversing in the current environment, but GOOGL’s 9% gains today on results/guidance that was NOT better than expected, merely not worse than expected might be the new beat and raise. This makes little sense to me, back in late January when we were in a raging bull market, devoid of fear of the coronavirus FB gets nailed, and now as our economy has been ravaged by it (aside from the human toll) the stock looks poised to retest those highs.

The good news for FB is that expectations for 2020 have already been brought down by investors and analysts with GAAP EPS expected to decline 18% you and sales only to increase 5% you. The data below shows the rate of revenue decelerating, which is quite staggering, per Bloomberg:

 

Wall Street analysts remain overwhelmingly bullish on FB with 44 Buy ratings, 4 Holds and 4 Sells with an average 12-month price target of about $215. One of the more bullish analysts who in mind is easily one of the best, Mark Mahaney from RBC Capital, who has a buy and a $238 12-month price target highlights the following to look for in the quarter in a note last week to clients:

 

My View into the print has been a bit confused by Google’s reaction today. Investors are clearly discounting any all bad news, looking past the current quarter and possibly the balance of 2020. This makes little sense to me.

If I were to play for a re-test of the prior highs I might consider a straight call or call spread in May expiration: For instance:

Bullish Trade Idea: FB ($194.50) Buy May 200 call for $5

Break-even on May expiration

Profits above 205

Losses of up to 5 between 200 and 205 with max loss of 5 below 200

Rationale: this trade idea risks 2.5% of the stock price over the next two weeks with a break-even up 5%, less than the implied move.

I’ll offer my normal disclaimer about long premium short-dated directional trades into events like earnings, you need to get a lot of things right to merely break-even, first and foremost directional than the magnitude of the move and timing.

 

On the flip side, if I were inclined to play for a move in line to greater than the implied move I might consider a put spread in June, for instance…

Bearish Trade Idea: FB ($194.50) Buy June 190 – 165 put spread for $6.50

-Buy to open 1 June 190 put for 9

-Sell to open 1 June 165 at 2.50

Break-even on June expiration:

Profits of up to 18.50 between 183.50 and 165 with max gain of 18.50 below 165

Losses of up to 6.50 between 183.50 and 200 with max loss of 6.50 above 200

Rationale: this trade idea risks 3.3% of the stock price and breaks-even down 5.6% and offers a max payout of up to 3x the premium at risk if the stock is down 15% in 6 weeks.

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