Will Facebook Continue to See Rising Prices?

With shares of Facebook (NASDAQ:FB) trading around $36, 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 to 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, and to build 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.

Social networking has been a powerful movement and tool in recent years, and has had a major influence in the way many companies and consumers operate daily. The company’s mobile app has reached a record 100 million users, while the simple app is most heavily used in emerging markets. Facebook reported earnings last Wednesday afternoon that surprised analysts, with strong profits from mobile ads. Facebook’s ad revenue from mobile was close to nothing a year ago, but in the second quarter, mobile ads made up 41 percent of the site’s total ad revenue of $1.6 billion. Chief Executive Officer Mark Zuckerberg predicted, “Soon we’ll have more revenue on mobile than desktop.”

T = Technicals on the Stock Chart are Strong

Facebook stock was stagnant over the last several months. The stock recently reported earnings that impressed investors, and is trading at highs for the year. Analyzing the price trend and its strength can be done using key simple moving averages.

What are the key moving averages? They are 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 signals 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

36.50%

16%

13%

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

Put IV Skew

Call IV Skew

August Options

Flat

Average

September Options

Flat

Average

As of today, there is 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 minimal 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 what that means for Facebook’s stock.

E = Earnings Are Increasing 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 rising earnings and revenue figures over the last four quarters. From these numbers, it seems the markets have been very happy 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

36.21%

18.65%

25.15%

77.67%

22.82%

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

Conclusion

Facebook aims to provide a very valuable social networking experience to its users, developers, and advertisers. A recent earnings release has investors in the company extremely excited about the company, and has the stock trading at highs for the year. Over the last four quarters, investors have been very happy with the company, as earnings and revenue figures have been rising. Relative to its peers and sector, Facebook has been a year-to-date performance leader. Look for Facebook to continue to OUTPERFORM.

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