Facebook Inc. (FB) stock has been a major disappoint in 2018, with the shares of the social media company down by 14% versus an S&P 500 which has climbed by 2%. Some options traders are betting the stock recovers some of those losses and rises by 7% in the coming weeks. Meanwhile, technical analysis also suggests the shares may be poised to rise by as much as 10%.
The company reported strong third quarter results with earnings easily topping estimates. Meanwhile, revenue fell short of forecasts for the second quarter in a row. As a result, analysts continue to lower their earnings estimates for the fourth quarter as the company struggles amid rising costs in a push to protect user privacy.
Betting On A Rise
The open number of call contracts due to expire on January 18 at the $155 strike price has more than doubled since October 31 to almost 30,000 contracts. With the contracts trading at $6.75, a buyer of the calls would need the stock to rise to $161.75; an increase of 7% from the current price of $150.50.
Nearing A Breakout
The chart also suggests the stock may be due to rise as it nears a potential breakout. The stock has been caught in a strong downtrend since August, and should the shares rise above that downtrend at $155; then they may rise as high as $166, an increase of 10%.
Despite the bets for a rise, analysts have cut their outlook for the fourth quarter and now see earnings falling by 2% versus the same period a year ago. Additionally, analysts have been reducing their earnings estimates for 2019 and 2020. For example, analysts have cut their earnings estimates for 2019 by 8% to $7.56 per share from prior estimates of $8.23 per share.
With Facebook's stock down by 30% from its highs, a rebound would not be that surprising. But for the stock to continue to rise as many investors are so used to, the company is going to need to drive earnings higher. For now, it would seem that strong earnings growth may be a struggle in 2019.
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.