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(Please note that the below article is based on two articles that were published on Wheel of Fortune on Feb. 3, one was posted pre-market, and the other during market hours.)
How It Started
Pre-Market Summary (Bullet Points):
This is not yet a trading alert (“TA”), but let’s call it a pre-market potential TA.
We started a position in Meta Platforms, aka Facebook, recently, as part of the SOP relaunch, but lousy earnings make the stock more attractive than it has (almost) ever been!
If and when we would ask for, and employ, a margin of safety in here, to the extent that it may be as wide as a March 2020-like opportunity.
The exact same drill. A different Stock.
Decent Current Earnings
Meta Platforms (FB) Q4 Earnings Report (“ER”):
GAAP EPS of $3.67 misses by $0.16.
Profit by segment: Family of Apps, $15.89B (up 6.8%); Reality Labs, -$3.3B (vs. year-ago -$2.1B)
Revenue of $33.67B (+20.0% Y/Y) beats by $230M
Revenue by segment: Family of Apps, $32.79B (up 20%); Reality Labs, $877B (up 22.3%); Other revenue, $155M (down 7.7%).
DAP was 2.82B on average for December 2021, an increase of 8% Y/Y
MAP was 3.59B as of December 31, 2021, an increase of 9% Y/Y
DAUs were 1.93B on average for December 2021, an increase of 5% Y/Y, below Street estimates for 1.95B
MAUs were 2.91B as of December 31, 2021, an increase of 4% Y/Y, below Street estimates for 2.95B.
Costs and expenses rose by a full 38%, however, causing a drop in operating profit that fed through to an 8% decrease in net income, to $10.29 billion.
Liquidity was $48B as of the end of the quarter.
Notably, the company changed its reporting structure, for the first time breaking out the results of its metaverse efforts in the Reality Labs unit. As expected, that unit is far from profitability.
In ticker news: Meta’s Class A common stock will change from its current FB ticker to the symbol META in the first half of this year. No action is needed by stockholders and its CUSIP number will be unchanged.
Extremely Disappointing Guidance
Q1 2022 Guidance:
It’s guiding to first quarter revenue of $27B-$29B, a 3%-11% Y/Y growth, but short of an expected $30.3B. “We expect our Y/Y growth in the first quarter to be impacted by headwinds to both impression and price growth.”
Impressions should see hurdles from “both increased competition for people’s time and a shift of engagement within our apps towards video surfaces like Reels, which monetize at lower rates than Feed and Stories.” On pricing, it sees several negative factors: Lapping the period when iOS changes weren’t in effect lapping a period of strong demand in the prior year; and foreign currency headwinds.
Chief Financial Officer Dave Wehner suggested the company would face headwinds both in impression and price growth – with price affected by “modestly increasing ad targeting and measurement headwinds from platform and regulatory changes.”
On the conference call, Wehner was able to add some color to that factor: He estimates that Apple’s ad tracking privacy changes would cost Meta a hefty $10 billion in ad revenue this year. The fourth quarter of 2021, meanwhile, was the first holiday season for the iOS changes to hit small businesses (which rely on digital ads to grow).
He also acknowledged the impressions challenge coming from heavy penetration of products like Facebook and Instagram. Seeing monthly active users and daily active users in the U.S./Canada “bounce around” somewhat should be expected given the existing market penetration, and the company also sees headwinds globally in places like India, where it faces user challenges like rate plan increases.
FY 2022 Guidance and Conference Call:
Expect 2022 total expenses to be in the range of $90-95B, updated from our prior outlook of $91B-97B.
Expect 2022 capital expenditures, including principal payments on finance leases, to be in the range of $29B-34B.
CEO Mark Zuckerberg did his typical preview of the company’s focus to introduce the call, but also highlighted two challenges in particular: One is increasing competition, a subject that was previously absent from the company’s earnings calls.
He even acknowledged the elephant in the room: “Apps like TikTok (BDNCE) are growing very quickly,” and that shows why a heavy focus on Meta’s short-form Reels format is “so important over the long term.” Not only is Reels under monetized in a way that recalls Facebook’s moves to features like Stories, but also Meta’s in the middle of a transition on its own services where short-form video is displacing some time otherwise spent on News Feed and other services, he said.
Reels was at the front of Zuckerberg’s mind throughout the comments. On some new products, he noted, the company has said it’s closer to the beginning of the journey than the end, meaning there are lots of fundamental questions to overcome.
Not so with Reels. “There is a very clear product/market fit. We face a much bigger competitor in TikTok. Do we have the content we need? It’s a flywheel,” so it’s dependent on having the right pieces in place. “For the coming quarter, it’s going to monetize at a slower rate, but it’s the right way to go.”
As for the iOS challenges, there’s “less data available to deliver relevant ads” – but people still want relevant ads, and so do businesses, he said.
The company has confirmed that its namesake app, Facebook, lost users quarter-over-quarter for the first time ever – by about half a million.
Extremely Alarming Reaction
As a result of the soft guidance, the stock is losing more than 1/4 (!!!) of its market-cap in the pre-market trading:
Extremely Cheap Valuation
Following this massive drop, FB is now becoming as cheap as it has ever been, with the exception of March 2020 of course.
Revenue estimates (before being updated following the last ER):
EPS Estimates (before being updated following the last ER):
Let’s be very conservative here, and assume an EPS run-rate of only $14.
That’s a multiple of 17.86x, using the stock price of $250 in PM trading.
When has FB ever traded with such a low trailing multiple? Never!
When has FB ever traded with such a low forward multiple? Only for a couple of months during the market turmoil around March 2020.
FB at $250? Great!
FB at $220? Even better…
A Historical Drawdown
An expected decline of 25% (in the stock price) would bring the total drawdown (from recent record high) to ~35%, in line with FB’s largest drawdowns ever (except the one that the stock suffered straight after it went public)
Rare, not to be missed, Combination
It’s unlikely for volatility (which is actually quite muted recently) to spike to the extreme levels of March 2020, or the early days pf FB (2012-2013) for that matter, but a combination of stock price in the low $200s and volatility above 50% is a combination you rarely see when it comes to FB.
To make a long story short, we would be looking to sell long-dated expiry/ies (in light of the high volatility) using ATM (perhaps slightly ITM) or (up to) 10%-20% OTM strikes that would give us the stock (net price, upon assignment) at no more than $220, hopefully even closer to $200.
All in all, $200 would be a fantastic price to get FB for, not only because it would be a circa 48% cut off the all-time high, but simply because at that level even a long-term $14 EPS run-rate would be imply a 14.3x multiple; that’s a multiple of a value, not growth, stock!…
Get ready for Face(book)Time!
[Based on “TRADING ALERT/S: February 3, 2022 / TAD“]
SELL (to open) FB 06/17/2022 210.00 PUT @ $12.00*
SELL (to open) FB 06/17/2022 215.00 PUT @ $13.50
SELL (to open) FB 06/17/2022 220.00 PUT @ $15.50
SELL (to open) FB 06/17/2022 225.00 PUT @ $17.50
SELL (to open) FB 06/17/2022 230.00 PUT @ $19.50
SELL (to open) FB 06/17/2022 235.00 PUT @ $22.00
SELL (to open) FB 06/17/2022 240.00 PUT @ $24.50
SELL (to open) FB 06/17/2022 245.00 PUT @ $27.00
SELL (to open) FB 06/17/2022 250.00 PUT @ $29.50
SELL (to open) FB 07/15/2022 220.00 PUT @ $17.00
SELL (to open) FB 07/15/2022 245.00 PUT @ $28.00
SELL (to open) FB 07/15/2022 250.00 PUT @ $31.50
SELL (to open) FB 09/16/2022 240.00 PUT @ $30.00
SELL (to open) FB 09/16/2022 250.00 PUT @ $35.00
SELL (to open) FB 01/20/2023 210.00 PUT @ $22.00*
SELL (to open) FB 01/20/2023 220.00 PUT @ $26.50*
SELL (to open) FB 01/20/2023 230.00 PUT @ $31.50*
SELL (to open) FB 01/20/2023 235.00 PUT @ $34.00
SELL (to open) FB 01/20/2023 240.00 PUT @ $36.50
SELL (to open) FB 01/20/2023 245.00 PUT @ $39.00
SELL (to open) FB 01/20/2023 250.00 PUT @ $41.50
For each of these 4 TAs (together or separately):
Risk Rating: 2.5-3 >>> Maximum** Allocation: 5%-6%
(These sales get a better risk rating due to their net price, upon assignment, being lower than $200, i.e. less risky; more on this hereinafter.)
For the other 17 TAs (together or separately):
Risk Rating: 3 >>> Maximum** Allocation: 5%
**Doesn’t equate suggested!; obviously, that’s an aggregate max. alloc. after taking into consideration all past and/or today’s straight BUYs and/or sold PUTs, if there’s any.
If there’s one thing you can’t say today it’s that you haven’t been warned…
Following the investment thesis that we’ve laid out earlier today, we’re selling PUTs on FB this morning as if they are hot cakes.
To wit from the article:
“To make a long story short, we would be looking to sell long-dated expiry/ies (in light of the high volatility) using ATM (perhaps slightly ITM) or (up to) 10%-20% OTM strikes that would give us the stock (net price, upon assignment) at no more than $220, hopefully even closer to $200.
All in all, $200 would be a fantastic price to get FB for, not only because it would be a circa 48% cut off the all-time high, but simply because at that level even a long-term $14 EPS run-rate would be imply a 14.3x multiple; that’s a multiple of a value, not growth, stock!…”
Instructions can’t be more precise than that!
FB has traded pre-market between $240 to $250? Combine this fact with the trades we announced on (per the below table in mind) and you get exactly what we promised/instructed/suggested:
The highest strike we use is 250.00; that’s “ATM (perhaps slightly ITM)” for you.
The lowest strike we use is 200.00; that’s “(up to) 10%-20% OTM strikes” for you.
The highest net price we “agreed” for is $220.50, and the lowest is $188.00; that’s “no more than $220, hopefully even closer to $200” for you.
The average net price we, assuming all options get assigned (and an equal-weight across all of these PUTs) is $207.21; that’s “$200 would be a fantastic price to get FB for” for you.
Here are all the PUT options we’re selling this morning, including their risk ratings, net prices (if and when they get assigned), and the average net price (if all options get assigned), assuming equal-weight across all these TAs:
PUT Sold (Symbol, Date, Strike)
FB 06/17/2022 210.00
FB 06/17/2022 215.00
FB 06/17/2022 220.00
FB 06/17/2022 225.00
FB 06/17/2022 230.00
FB 06/17/2022 235.00
FB 06/17/2022 240.00
FB 06/17/2022 245.00
FB 06/17/2022 250.00
FB 07/15/2022 220.00
FB 07/15/2022 245.00
FB 07/15/2022 250.00
FB 09/16/2022 240.00
FB 09/16/2022 250.00
FB 01/20/2023 210.00
FB 01/20/2023 220.00
FB 01/20/2023 230.00
FB 01/20/2023 235.00
FB 01/20/2023 240.00
FB 01/20/2023 245.00
FB 01/20/2023 250.00
Assuming all options get assigned and are
the average net price is:
Note that the stock has actually traded even lower after we announced these TAs, meaning that you’re very likely to be able to execute all/most of the above mentioned, perhaps even for higher premiums than the ones we got.
Meanwhile, just as expected, volatility is jumping over 50% (even 60%) short expiry dates (next months) and over 40% on the longer-dated expiries (up to 12 months).
This is why we’re mainly selling two sets of options; the first one (June-July 2020) is to capture as much volatility as possible (45%-50%), and the second one is to capture maximum tenor (which is even more suitable for high/spiking volatility, as you wish to hit the “volatility iron” with long duration while it’s hot).
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