(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Facebook Inc. (FB) already has plunged 33% from its highs in recent months, a precipitous decline. If that weren't enough, the outlook for the company and its stock appears to be growing darker. Options trades indicate that the company's shares may fall as much as 7% in the coming weeks, just as it prepares to report third-quarter results after the close of trading on Tuesday. Should that happen, the stock would be 38% off its 2018 highs.
The options market also suggests elevated levels of volatility in the period around earnings, with the potential for the shares to rise or fall 11%. The high levels of uncertainty come as analysts continue slashing earnings estimates for the third quarter amid rising security costs to protect privacy of data on the world's leading social network, which has more than 2 billion users worldwide.
Betting on a Drop
The options due to expire on November 16 at the $145 strike price suggest that the stock may fall to roughly $139, a drop of 5%. That is because the number of bearish put bets outweighs the bullish call bets by a ratio of 5 to 1, with 9,200 open put contracts. The bearish bets are worth nearly $5.7 million. The puts at the $140 strike price also see a large amount of open interest and suggest a decline of 7% to $135.75, from the stocks current price of $146.35.
Additionally, an analysis of options pricing using the long straddle strategy indicates the stock may trade higher or lower by 11% from the $145 strike price. It places the stock in a trading range between $129 and $160 by expiration.
The negative bets are a result of what is expected to be a weak quarter for the company. Analysts estimate that earnings for the quarter will fall 9% to $1.44 per share. Meanwhile, revenue is forecast to climb 34% to $13.82 billion. Those earnings estimates have dropped 21% since the company reported second-quarter results.
The estimates for 2018 earnings continue to inch lower, too. Facebook's earnings outlook has been slashed to 17% growth from 25% earlier. Even worse, earnings estimates have fallen for 2019 and the following year.
The outlook for Facebook continues to deteriorate as it's whipsawed by a wave of privacy and management crises that have eroded investor confidence in the company. Unless Facebook provides something positive to change investor sentiment on Tuesday, the stock is likely to drift lower, especially if it's caught in a broader sell-off of the technology sector.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.