Can Facebook Break Out?

With shares of Facebook (NASDAQ:FB) trading around $62, 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.

Social networking giant Facebook has reported profits of $642m during the first-quarter of 2014, beating analyst expectations. The firm said that a surge in mobile advertising helped push revenues 72 percent higher, to $2.5bn in the January-to-March period. Mobile now makes up 59 percent of advertising revenue, from 30 percent a year ago. Facebook also announced chief finance officer David Ebersman will be stepping down after five years at the company. Mr. Ebersman, who will remain with the company until September, said he plans to return to the healthcare industry. He will be replaced by David Wehner, Facebook’s vice president for corporate finance and business planning, and the former chief financial officer at games company Zynga (NASDAQ:ZNGA).  “Facebook’s business is strong and growing, and this quarter was a great start to 2014,” said founder and chief executive Mark Zuckerberg in a statement. “We’ve made some long term bets on the future while staying focused on executing and improving our core products and business. We’re in great position to continue making progress towards our mission.” Shares of Facebook rose as much as 4.3 percent in after-hours trading.

T = Technicals on the Stock Chart Are Mixed

Facebook stock has  been exploding to the upside in recent years. However, the stock is currently trading sideways and may need time to consolidate. 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 between its rising key averages which signal neutral 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

44.35%

23%

20%

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

Put IV Skew

Call IV Skew

May Options

Average

Average

June Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral 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 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?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

183.33%

1,322.38%

108.33%

58.33%

Revenue Growth (Y-O-Y)

71.60%

5.65%

59.75%

53.13%

Earnings Reaction

1.84%*

14.10%

2.44%

29.61%

Facebook has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Facebook’s recent earnings announcements.

* As of this writing

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

8.66%

9.77%

-5.74%

-22.70%

-1.50%

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 on Wednesday reported profits of $642m during the first-quarter of 2014, beating analyst expectations. The stock has been exploding to the upside but is currently trading sideways. Over the last four quarters, earnings and revenues have been increasing, which has left investors pleased. Relative to its peers and sector, Facebook has been a relative year-to-date performance leader. Look for Facebook to continue to OUTPERFORM.

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