It's almost time.
After the close today, Facebook
(NASDAQ:FB) will deliver the most-widely anticipated report of third-quarter earnings season.
With the stock down nearly 50% from its May IPO and one uninspiring quarter already in the bag, the Facebook bull camp is looking for a kick-save before giving up altogether, while the bears are angling for more fresh meat.
It's been an eventful quarter for Facebook to say the least, and the crosscurrents are raging as investors debate the efficacy of the company's mobile-advertising initiatives and its rapid slowdown in revenue.
So let's go through all the important issues one by one.
In my opinion, Facebook would be dramatically lower than it is today if not for CEO/Founder Mark Zuckerberg's interview at the TechCrunch Disrupt Conference on September 11. (See: Wait a Minute! Did Facebook's Mark Zuckerberg Really Say Anything New?
At that event, Zuckerberg laid down the gauntlet for anyone doubting that Facebook will be big in mobile, by making the following statement:
So mobile is, there are going to be more users, each user's going to use spend more time, and per amount of time that they spend, we're going to make more money than we make on desktop.
Now as always, the important question is not who, what, where, or why, but when?
There's a legitimate argument that Facebook's big mobile revenue splash occurred this quarter, judging by how many ads are being stuffed into users' mobile news feeds. There are concerns that this could impact the user experience, but at the end of the day, I'm worried about earnings in the here and now.
However, on October 1, Facebook COO Sheryl Sandberg was interviewed on CNBC and may have provided evidence to the contrary. Here's a transcript of a brief part of the interview.
Q: Has the new mobile app you launched in August boosted revenue?
A: The new mobile app is boosting engagement, and engagement always leads to revenue.
Now we're playing a game of semantics here, but I view that answer as elusive, and a key factor in why I am short Facebook. (See: Facebook Hits 1 Billion Users Mark. So Is That a Good Thing or a Bad Thing?
Additionally, I view it as a negative that the company hasn't yet released a new Google
(NASDAQ:GOOG) Android app to match its highly-successful Apple
(NASDAQ:AAPL) iOS one. However, I will concede that it is entirely possible that Sandberg was playing rope-a-dope.
As Mr. Cooper
likes to say, you puts up your money, you takes your chances.
Another important part of the Facebook revenue equation is payments revenue (12% of revenue last quarter), the primary source of which is embattled social gaming company Zynga
(NASDAQ:ZNGA), which is on a losing streak, to say the least. On October 5, Zynga significantly lowered its full-year outlook as bookings continue to fall off a clip. (See: Why Zynga's Mess Is Bad for Facebook
Once growing faster than the advertising business, the payments business is falling apart as the fad of many social games has worn off.
It's also important to note that last quarter, an additional 4% of revenue came from ads generated by Zynga apps.
So if you're long or short Facebook, here's what you have to weigh right now:
1. The effectiveness of the new mobile-advertising push during the quarter.
2. Whether that push offset the slowdown in desktop usage
3. The impact of the social-gaming collapse.
4. A valuation that may be cheap on a big beat, or drastically expensive on a miss.
There are enough crosscurrents here to generate mass confusion, which in my opinion, will create some wild action in the stock.
In fact, I think the market is underestimating the potential volatility in the stock after the report. As of the time I'm writing this, the at-the-money straddle on the weekly options implies that investors are expecting a 12% move in the stock by Friday.
I would guess we're in store for a 15% move at a minimum, and in fact, I partially hedged my short position (transforming it from a rather large no-guts, no-glory trade to a more garden-variety speculative bet) because if I'm wrong, I'm not going to be a little wrong. I'm going to be a lot wrong. That said, I still feel safer on the short side than the long side and I'm making my stand.
Good luck out there!
Position in FB
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