Monday, October 20, 2014

* Facebook (FB) - Earnings Preview: Unprecedented Growth, Expectations and Risk Collapse

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FB has earnings due out on 10-28-2014, after the market closes.  I will write a full earnings preview for MarketWatch next week, but here's a taste and a few things to watch before that publication.

FB is now worth $200B (market cap) and is growing at a totally unprecedented rate for mega-caps in North America once we exclude biotechnology.  The valuation (through Price: Sales) has been consistent, but high, and the risk in the option market is collapsing relative to prior earnings releases.

Through all of that, aside from revenue and net income, there is one single metric that is a result of many other financial measures that will ultimately drive the earnings result... and it is up 67% in the last year and half.  It's this number that hides in the bushes that could be be... everything...

Let's first visualize the growth of FB relative to other firms in the US with market caps greater than $50B that aren't biotechnology or telecommunications.

With Net Income 2-year growth on the y-axis and Revenue, 2-year growth on the x-axis, FB sits on an island totally by itself.  The firm is growing both revenue and earnings faster than any of these peers... by a lot.

Net Income (TTM) and Revenue (TTM)
If you're looking for a singular chart to point to for the appreciation in FB stock, it's this one.  The blue bars show the straight line growth in revenue which now sits at $10B in the trailing-twelve-months.  The green line shows the straight line growth in net income which sits at $2.4B in the trailing-twelve-months.

Why does FB trade at a P/E (forward) of over 37?... Because of the chart above and the chart below.

Operating Margins
Ultimately there's a lot in between revenue and net income.  The broader full earnings preview will examine those factors, but it does come down to operating revenue vs. operating expense.  FB has gone from generating $1.10 in revenue for every $1 in expense to now $1.77 generated in revenue for every $1 in expense.  That's insane growth.  If you're looking for "a number."  This is it.

If FB can continue to grow revenue and this number continues to improve, every analyst on Wall St. can jump up and down about valuation, but the stock will rise.

Now let's turn to the IV30™ chart and risk.

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The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days).

In English, the red curve is the risk in future stock price movement.  The blue "E" icons represent earnings events and we can see that, as of right now, the risk into FB earnings is lower than ever before.

There is still a week to go ahead of the event, so that red curve should rise, but for now, there is a great chance of a market risk malaise with respect to the stock and the risk embedded in earnings.

This is trade analysis, not a recommendation.

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1 comment:

  1. Stock market is unpredictable…. Here the NY times has reported a decline in FB Stock market..