Can Facebook Keep Meeting Its High Expectations?

With shares of Facebook (NASDAQ:FB) trading around $66, is FB an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Facebook is engaged in building social products in order to create utility for users, developers, and advertisers. People use Facebook to stay connected with their friends and family, to discover what is going on in the world around them, and to share and express what matters to them with the people they care about. Developers can use the platform to build applications and websites that integrate with Facebook to reach its global network of users, building personalized and social products. Advertisers can engage with more than 900 million monthly active users or subsets of users on Facebook based on information they have chosen to share.

Facebook’s No. 2 executive, Sheryl Sandberg, apologized on Wednesday for the psychological experiment the social network conducted on nearly 700,000 unsuspecting users. She said the experiment that tested whether Facebook could manipulate users’ emotions was “poorly communicated.” Sandberg made the comments while on a visit to New Delhi, according to The Wall Street Journal. Sandberg is in India meeting with businesses that advertise on Facebook to generate more revenue from emerging markets. Her apology came as British data protection authorities said Wednesday that they are investigating the Facebook experiment.

T = Technicals on the Stock Chart Are Strong

Facebook stock has been moving higher over the last couple of months. However, the stock is currently trading sideways and may need time to consolidate. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Facebook is trading above its rising key averages, which signals neutral to bullish price action in the near-term.

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Facebook options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Facebook options

37.75%

90%

88%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Flat

Average

September Options

Flat

Average

As of Wednesday, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.