(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Options traders see Facebook Inc. (FB) rising by nearly 10% by mid-May from its current price around $160.75. The optimism in the stock comes ahead of Mark Zuckerberg testimony before Congress relating to the Cambridge Analytica scandal over user privacy. The controversy resulted in shares dropping by nearly 9% on the year, nearly 8 percentage points worse than the S&P 500 index.
It is not only the options traders who remain optimistic, because to this point analysts have failed to reduce their revenue or earnings outlook in a meaningful way since the scandal became headline news. In fact, the average price target on the stock has risen since the start of the year to $216.40, according to data from Ycharts, over 34% higher than its current price.
The long straddle options strategy set to expire on May 18 is pricing in a rise or fall of 10% from the $160 strike price. It places the stock in a trading range $144 to $176, a wide range, showing the massive amount of volatility traders are expecting over the next month. The number of open calls to open puts is nearly even with nearly 33,600 open call contracts to 31,600 open put contracts. But most interesting is that the open interest on the calls climbed 12-fold since March 26 when only 2,800 contracts were open. The bullishness of the calls comes in stark contrast to the number of open puts, which increased by just 40% from 22,300 open contracts during the same time. It suggests that traders have been recently turning more bullish on the stock, looking for it to rise over the next month.
A Sharp Rise
Analysts have also been positive on Facebook, and are looking for shares to soar over the next year, with the average price target up by nearly 5% to $214.60, from approximately $206 on Dec. 29, 2017. The price target is slightly off its high of $222 on March 9, a drop of roughly 2.6%.
Not Trimming Estimates
Analysts have yet to meaningful trim their revenue and earnings outlook, suggesting that analysts at this point do not see a significant impact on Facebook's business from the Cambridge Analytica scandal. Earnings estimates have climbed by 10% since the start of the year to $7.33 per share, representing growth of nearly 19% over last year. Meanwhile, revenue estimates have climbed by over 3% to $55.24 billion, with analysts looking for an increase of almost 36% versus the prior year.
With an options market and analyst community that remains bullish on Facebook despite the negative publicity, it could point to better days for Facebook's stock price. The only things that remain to be judged are the revenue and earnings results, along with the business outlook when the company reports quarterly results in a few weeks time.
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.