(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Shares of Facebook Inc. (FB) are up nearly tenfold over the past five years, easily outpacing the S&P 500 return of just 66 percent. Facebook options traders are betting those gains will continue. They see the stock surging 7 percent to a new record high over the next two months - specifically by mid-September. Strong earnings and revenue growth along with a low valuation may be the driving forces behind the stock's gain. Facebook reports quarterly results next week on July 25.
Shares of Facebook have shown remarkable resilience. They initially plunged more than 20 percent from their January high as concerns over user data privacy sent shares reeling. The declines culminated with CEO Mark Zuckerberg's congressional testimony. But since March 27, the stock has risen over 34 percent, fueled by strong first-quarter results.
Bullish Momentum To Continue
Some options traders see the stock rising to roughly $221.65 by expiration, an increase of about 7 percent. The open interest at the $215 strike price calls has steadily increased, with roughly 20,000 open contracts. The options cost about $6.50 per contract, and a buyer of the calls needs the stock to rise to $221.50 to break even if holding the options until expiration.
The long straddle options strategy implies that shares of Facebook rise or fall by expiration on September 21 from the $200 strike price. It places the stock in a trading range between $180 and $220. The number of bullish bets at that strike price outweigh by 3 to 1 wagers that the stock will fall.
Traders' bullish outlook may stem from what is expected to be a strong second-quarter earnings report. Analysts are looking for the company to say that earnings grew by 29 percent and revenue 44 percent. Analysts have upped their earnings estimates over the past month by about 1 percent, while revenue estimates have risen fractionally.
The company's valuation is also at compelling levels, trading at just 22.5 times 2019 earnings and at the lower end of its historical earnings multiple.
Facebook stock has posted such staggering gains in recent years that cautious investors may worry just how much higher it can go. For options traders that doesn't matter. For the short term, they see Facebook surging higher, assuming of course that Facebook delivers on earnings.
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.