Market Overview

Wall Street Expectations Running High For Facebook's Q3 Earnings


Facebook (NASDAQ: FB) bulls have showered "likes" on the social media giant in recent sessions if its stock performance is any guide; it tapped at all-time high last week in the lead up to today’s post-close earnings release. So, can the results deliver on the hype?

The stock is in good company. FB’s report follows mostly Street-beating earnings news in recent sessions from Google’s renamed Alphabet (NASDAQ: GOOGL, GOOG), Twitter (NYSE: TWTR), and LinkedIn (NYSE: LNKD). The three noted solid online advertising performance in Q3 despite slower overall economic growth—a development that could play out similarly for FB, if you ask many industry analysts.

Wall Street analysts, on average, are forecasting the social-media granddaddy to chalk up per-share profit of $0.52 on topline sales of $4.37 billion, according to Thomson Reuters. If realized, that’s equal to a 21% surge in earnings and a 36% rise in revenue when compared to the same quarter a year earlier.

All About Growth
Industry analysts have written about FB’s dynamic product ads—called Canvas and still in testing—that the company claims are promising for better e-commerce experiences for users. They’ve noted a new integrated advertising system that works with TV ads and is reportedly effective with older demographics, plus other efforts to monetize user activity. FB has claimed 1.44 billion monthly active users in Q3, reigning over its social-media competition.

According to a note from Cantor Fitzgerald analyst Youssef Squali, Wall Street is expecting Facebook's ad revenue to have grown 41.2% year-over-year in Q3 to $4.176 billion, representing a growth path that is nearly three times faster than the overall ad market, but also marking a deceleration from 43% growth in the prior quarter. The company's mobile ad revenue is expected to rise to nearly 80% ($3.338 billion) from 76% in the prior quarter and "virtually zero" in early 2012, according to that note.

Industry analysts also speculate that Facebook could show its monthly active user (MAU) base grew 13.4% year-over-year to 1.531 billion and an engagement of daily active user (DAU) to MAU reading of 0.651, which would be consistent with prior quarters.

Stock and Option Action
FB shares are up some 35% since this time last year and since the late-August dip are up 25%. In the last month alone, the shares have tracked up better than 11% and have been on a fairly steady upward climb. However, since hitting $105.12 on October 29, the stock has sold off slightly, down some 2% (figure 1).

The implied volatility on its options is at the 49th percentile and may underscore a hurry up-and-wait attitude and some uncertainty for the stock’s next leg. The historical volatility is in the 16th percentile for the year.

At this point, short-term options traders are pricing in a potential 6% move in either direction for the stock around earnings, according to TD Ameritrade’s thinkorswim® platform’s Market Maker Move indicator. Buying interest is up in the 105, 107, and 100 option calls. Put buying has picked up at the 100 strike—a potential psychological marker for puts even if it’s not necessarily a stock chart technical level.

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