Facebook: Postmortem for a Bear With Psychological Problems
Facebook reported better-than-expected earnings after the close yesterday.
Facebook reported Q3 earnings of $0.12 per share, beating estimates by a penny. Revenues were also ahead of expectations at $1.26 billion.
The company's advertising revenue was up a whopping 36% year-over-year, with a significant 14% coming from mobile.
Payments revenue was predictably slow, showing a smaller 13% year-over-year increase. With the implosion of Zynga (Nasdaq:ZNGA), this business line will stay under pressure, but that's not what investors care about now.
Sentiment towards Facebook is all about mobile advertising dollars and it just made a big statement with that 14% number, sending the stock up over 20% today.
Now, I was short Facebook heading into the quarter, and that means I'm on the losing end this morning. That means no dinner at Sizzler, and no new Apple (Nasdaq:AAPL) iMac, which turned out to be the star of the show at yesterday's press event.
However, I feel doubly stupid because I passed up the easy-money trade on Facebook, which was betting on a huge move rather than a directional one.
Here's what I wrote on Monday in MInyanville's Buzz & Banter (click here for a FREE two-week trial):
Call me crazy, but Facebook (FB) options are looking awfully cheap ahead of earnings tomorrow.
The $19 straddle on the weekly options implies a ~12.5% move by the end of the week. While 130%+ implied volatility readings seem expensive on the surface, in this case, the pricing actually seems awfully conservative to me when you think about how controversial Facebook is, and all the mixed noise this quarter, which includes:
1. Mark Zuckerberg's bullish-on-mobile interview at the TechCrunch Disrupt Conference
2. COO Sheryl Sandberg's CNBC appearance where she talked mobile engagement but not revenues.
3. A mountain of analyst target-price cuts and the BTIG downgrade to sell.
4. The Barron's article.
5. The blow-up at Zynga (ZNGA), which destroyed sentiment towards social gaming.
I echoed these points in yesterday's earnings preview:
Well at least I was right about something -- Facebook is up a lot more than 12% today, and that $19.50 straddle is trading at $4.55, for an 82% gain in one day.
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.
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