(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Facebook Inc.'s (FB) stock has fallen by more than 20% since the company reported second-quarter results at the end of July. Now some options traders are betting the decline in the stock isn't over and that it may fall by as much as an additional 15% by November. The technical chart also suggests there may be more trouble ahead for the stock.
Analysts have been slashing their revenue and profit forecasts for the social media company for the coming third quarter and full year. Analysts are now forecasting for the company to see its earnings decline by more than 3% versus last year in the third quarter, a stark contrast to prior views for growth of more than 13%.
The options set to expire on Nov. 16 at the $175 strike price show the number of puts outweighing the calls by a ratio of nearly 2 to 1 with almost 9,000 open put contracts. A buyer of the puts would need the price of the stock to fall to roughly $164, a drop of more than 6% from the stock's closing price of roughly $194 on Aug. 16, if holding the puts until expiration. It is no small bet either, valued at more than $9 million.
Some options traders are betting shares fall even further—by more than 15%. The put options at the $150 strike price have seen their open interest levels rise by about four-fold to nearly 8,000 open contracts over the past few days. For the buyer of the puts to break even, shares of the stock would need to fall to roughly $147.50, if holding the options until expiration.
The technical chart is also weak and suggests the stock is breaking down. Should it fall below technical support at $173, the next level of support would come at $166.
Reducing Profit Estimates
Analysts are also reducing their growth outlook for the company, and now see earnings in 2018 growing by 19%, down from previous growth of almost 26% at the start of July. Additionally, the outlook for 2019 and 2020 has been reduced and forecast to rise by roughly 15% and 12%, respectively, down from prior forecasts of more than 20% and approximately 17%.
There is no doubting that investors were shocked when Facebook reduced its earnings and revenue guidance when reporting its second-quarter results. It would seem the stock is still sorting out what the impact over the longer term is likely to be, and as long as that uncertainty is an overhang, the stock is likely to continue to struggle.
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.