Facebook reports earnings after market close Wednesday, July 25. And at the end of the week, Twitter reports before the open on Friday, July 27.

Both of the companies have come under fire in 2018 for a range of issues including fake news, election interference and data privacy. Despite the on-and-off negative publicity, it doesn’t seem to be hurting their stocks as both are up by double-digits so far this year.

The EU’s General Data Protection Regulation (GDPR) also went into place during the quarter, so it will be interesting to see what management has to say about that and whether or not they’re seeing a business impact from the new regulations.

Facebook Earnings and Options Trading Activity

Facebook is expected to report adjusted EPS of $1.75 on revenue of $13.34 billion, according to third-party consensus analyst estimates. In the same period last year, Facebook reported adjusted EPS of $1.32 on revenue of $9.32 billion.

In Q1, Facebook reported that revenue had increased 49% year over year to $11.97 billion. Mobile ads accounted for 91% of total ad revenue in Q1, according to the company, a figure that has continued to grow as desktop usage has declined.

Ad revenue grew at a double-digit pace across all geographic regions, with the strongest growth reported in Europe and the Asia-Pacific region, which were up 59% and 52% year over year, respectively. Revenue in the U.S., the company’s largest market, still grew at a 43% pace.

Facebook also reported that monthly active users (MAUs) totaled 2.2 billion at the end of Q1 and daily active users (DAUs) averaged 1.45 billion in the month of March, both up 13% compared to last year. These metrics will likely be closely watched this quarter, as they’ll provide an idea of how usage was impacted by some of the company’s recent scandals.

Beyond the numbers, investors are likely to be digging into progress in the company’s operations. On last quarter’s call, management said their three main priorities are helping business leverage the power of mobile, developing new ad products and making ads more relevant and effective.

In recent quarters, Facebook has rolled out several new ad products, and on last quarter’s earnings call CEO Mark Zuckerberg said that building out the “business ecosystems” around apps like WhatsApp, Instagram and Messenger will be a primary focus for the company over the next five years.

Facebook has increasingly layered ads into Instagram, as well as adding more features that has allowed them to offer new advertising products to marketers. It has also started to roll out ads in Messenger, although it has yet to do so with WhatsApp.

Another area analysts have expressed interest in is growing expenses at the company. Zuckerberg highlighted election interference, fake news and other issues as reasons Facebook will need to continue to invest in safety, security and privacy. One way it is doing this is by doubling the size of their team that works on security and content review to 20,000 by the end of 2018.

What Scandal? Facebook shares tanked in March when the news of the Cambridge Analytica scandal broke. After the initial selloff, it seems like investors decided it wasn’t going to impact the business that much after all. The stock hit a new all-time high of $216.20 yesterday and shares are up 18.33% year to date. Chart source: thinkorswim® by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.thinkorswim

Around the earnings release, options traders have priced in a 5% stock move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility was slightly elevated and at the 62nd percentile as of this morning.

In short-term trading at the July 27 weekly expiration, calls have been active at the 215 strike price, although there have been high volumes across a range of strikes that are around the money. On the put side, volume has been lighter and trading has been spread out across a range of strikes with no real standouts.

Looking at the August 17 monthly expiration, both the 220 and 230 strike calls have been active in recent trading. Volume over the past few days has also been on the lighter side compared to calls, although the 200 strike put has a high level of open interest with 40,429 contracts open at the end of Tuesday’s session.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Twitter Earnings and Options Trading Activity

For Q2, Twitter is expected to report adjusted EPS of $0.17, up from $0.08 in the prior-year quarter, on revenue of $696 million, according to third-party consensus analyst estimates. Revenue is projected to increase 21.3% year over year.

After a long stretch of underperformance, Twitter’s stock has had a big run in 2018 and is up 72% year to date. The rally has taken a breather ahead of the earnings report amid several news reports that the company had purged 70 million accounts in May and June, a sizable portion considering Twitter reported 336 million MAUs in Q1. Analysts, on average, are expecting about 339 million MAUs for Q2.

Twitter CFO Ned Segal responded to those reports saying “Most accounts we remove are not included in our reported metrics as they have not been active on the platform for 30 days or more, or we catch them at sign up and they are never counted.” He also noted that the company would publicly disclose if it was removing that many user accounts. Still, the reports probably gave some investors pause.

Rally on Hold. Twitter’s stock has had a sizable rally and is up 72% year to date, outperforming the S&P 500’s 4.62% increase. The stock has been trading up and down in a tight pattern since mid-June, after it had a big run from the end of April to then. Chart source: thinkorswim® by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.thinkorswim

Options traders have priced in just under a 10% stock move in either direction around the upcoming earnings release, according to the Market Maker Move indicator. Implied volatility was at the 72nd percentile as of this morning.

In short-term trading at the July 27 weekly expiration, calls have been the most active at the 45 strike, with decent volume at the 42, 42.5 and 43 strikes as well. On the put side, most of the recent trading has been concentrated at the 39 and 40 strikes.

At the August 17 monthly expiration, recent trading on the call side has been heavier at the 45 and 47 strikes. Puts have been active at the 39 strike, about 10% below where the stock closed on Tuesday. The 40 and 42 strike puts have also had higher volume in recent trading.

What’s Coming Up

There are quite a few reports from big tech companies coming up. Some of the notable ones include Amazon and Intel after the close Thursday, July 26; and Apple after the close on Tuesday, July 31.

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