Will Facebook Reach All-Time Highs?

With shares of Facebook (NASDAQ:FB) trading around $44, is FB an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Facebook is engaged in building social products in order to create utility for users, developers, and advertisers. People use Facebook to stay connected with their friends and family, to discover what is going on in the world around them, and to share and express what matters to them with the people they care about. Developers can use the Facebook platform to build applications and websites that integrate with Facebook to reach its global network of users, building personalized and social products. Advertisers can engage with more than 900 million monthly active users on Facebook — or subsets of its users — based on information they have chosen to share.

Facebook’s privacy policy is coming under fire from some privacy groups, which wrote a letter to the Federal Trade Commission asking the government agency to block some upcoming changes to the policy that would allow Facebook to give personal information about its users to advertisers. “Facebook users who reasonably believed that their images and content would not be used for commercial purposes without their consent will now find their pictures showing up on the pages of their friends endorsing the products of Facebook’s advertisers,” the letter noted.

Facebook is inching closer to reaching its all-time high of $45 that the stock hit on May 18, 2012. After reporting second-quarter earnings that blew analyst expectations out of the water last month, the stock has continued its surge higher. Investors will be watching the stock closely today to see if it can reach or surpass $45.

T = Technicals on the Stock Chart Are Strong

Facebook stock has been exploding higher in the last couple of months. The stock is currently trading at highs for the year and near the key $45 per share price level. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Facebook is trading above its rising key averages, which signal neutral to bullish price action in the near-term.

FB

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Facebook options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Facebook Options

41.23%

86%

85%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

September Options

Flat

Average

October Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Improving Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Facebook’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Facebook look like and more importantly, how did the markets like these numbers?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

58.33%

0.00%

-89.46%

-120.00%

Revenue Growth (Y-O-Y)

53.13%

37.81%

40.14%

32.29%

Earnings Reaction

29.61%

5.61%

-0.83%

19.12%

Facebook has seen improving earnings and rising revenue figures over the last four quarters. From these numbers, the markets have been excited about Facebook’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Facebook stock done relative to its peers Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOG), LinkedIn (NASDAQ:LNKD), and sector?

Facebook

Microsoft

Google

LinkedIn

Sector

Year-to-Date Return

66.91%

16.91%

24.72%

120.20%

35.46%

Facebook has been a relative performance leader, year-to-date.

Conclusion

Facebook looks to provide a valuable social networking experience to its users, developers, and advertisers. The company is under fire once again due to privacy issues as it gets closer to previous all-time high prices. The stock has been exploding higher in recent months and is now trading at highs for the year. Over the last four quarters, earnings have been improving while revenues have been rising which have left investors excited about the company. Relative to its peers and sector, Facebook has been a year-to-date performance leader. Look for Facebook to OUTPERFORM.

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