Thursday, July 26, 2012

Facebook Inc (NASDAQ:FB) Investors Prepare for Unprecedented Results Post-Earnings

Ever since its debut in the market in May as a public company, Facebook Inc (NASDAQ:FB) has dropped about 25%. Therefore, it is not surprising why investors are anticipating something unexpected. A forecast of a 14% move up or down in Facebook shares have been made by the options market. The results will be revealed after the first earnings report on Thursday, which means that on the following day, the stocks might go up to $32 or plummet to $24.

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According to the chief derivatives strategist at TD Ameritrade, JJ Kinahan, Facebook can’t be blamed for the outcome. They just need to prove that their business will be stable and profitable in the long run. Investors are wary about first earnings of social media firms as there can’t be comparisons. Credit Suisse has stated that derivatives markets may overprice options ahead of first earnings. In most cases, the options market predicted bigger swings than the actual moves. Average move was around 14.4 %( as expected in Facebook), while the actual figure comes to just 8.5%.

There has been enormous hype about Facebook’s IPO but it has been a huge let-down. Ahead o Earnings, shares of FB are down 6.44% to $27.46, whereas it was $38 in its market debut on May 18. Terry Wilson, equity derivatives strategist at Credit Suisse, has attributed the expected 14% post-earnings move to a significant uncertainty in the market. Thomas Reuters has reported that in spite of the fall in the share price, Facebook is operating at about 70 times earnings. An analysis has revealed the company's intrinsic value at a modest $9.72 a share.

Facebook has over 900 million users, making it the world’s largest social networking company and has posed a threat to other established web-based companies in terms of consumers’ online time and advertising revenue. Based on such statistics, analysts have predicted the revenue for the 2nd quarter to increase 28% to 1.15 billion dollars.

Trade Alert states that Facebook is the 6th most actively traded option on an individual stock due to option flow picking up over past two weeks to average 120,000 contracts per day.

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