Facebook Inc. (FB) may still have further to climb, at least some traders seem to think so based on recent options bets. The shares have advanced by around 90% off their March lows, gaining roughly 25% since the start of the year. The stock is easily outperforming the broader S&P 500, which has gained nearly 6%.
The significant advance comes despite a sharp slow down in growth as the pandemic has hit advertising revenue. It has resulted in revenue and earnings estimates falling sharply, from their pre-pandemic levels. However, those expectations have started to recover, helping to lift the shares.
Betting The Rally Continues
The improving outlook could be one reason some traders are still betting on higher prices. The open interest levels for the September 18 $265 puts and calls both increased by about 8,000 contracts on August 17. When digging into the data more closely, we find that the calls were bought for about $9.50, while the puts were sold for approximately $12.60. It created a bull spread transaction, one where the trader received $3.10 per contract and a bet that the stock is trading above $265 by the expiration date in September.
Boosting Forecast
The stock surged following better than expected second-quarter results, prompting analysts to raise their revenue forecasts for 2020 to $80.1 billion from $77.7 billion at the end of July. Additionally, 2021 revenue estimates have risen to $99.2 billion from $96.5 billion. Despite the improving outlook, those estimates are still down sharply from the prior forecast in February of roughly $85 billion for 2020, and $102.5 billion for 2021.
Earnings estimates have been on the rise too, increasing to $8.00 per share for 2020 from $7.29 per share in July. Meanwhile, estimates for 2021 have grown to $10.12 per share, from forecasts from $9.75 per share. Still, like revenue, earnings estimates for 2020 and 2021 are both down significantly from February when they stood at $9.10 and $10.86, respectively.
Multiple Expansion
Currently, it leaves the shares trading for about 25.8 times one-year forward earnings estimates, its highest valuation since 2017. The higher stock price on lower earnings expectations suggests that the entire stock gains have come on the back of multiple expansion in 2020, and not due to revenue and earnings growth. It does create a significant risk for the stock’s direction should that earnings multiple begin to contract. The stock’s multiple contracted in 2018 and 2019 as the business margins compressed and as the possibility of regulation increased.
As long as the company can continue to improve earnings and revenue sentiment, then shares are likely to thrive. But if the market decides that earnings multiples are too high, then Facebook’s stock could suffer despite the bullish options betting.
Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.
Mott Capital Management, LLC is a registered investment adviser. 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. Past performance is not indicative of future results.
