Analyst Issues Word of Warning for Facebook Stock

FB is turning in a rare quarterly underperformance

Dec 19, 2017 at 2:07 PM
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While Twitter (TWTR) explores new highs -- extending yesterday's analyst-induced surge -- shares of Facebook Inc (NASDAQ:FB) are slumping after MoffettNathanson wrote a note to clients entitled "Facebook: Is it Time to Get Out?" In reaction, FB is trading down 1.2% at $178.71, with FAANG stocks feeling additional pressure from this morning's unusual Apple (AAPL) downgrade.

In its note, the brokerage firm reiterated its "buy" rating on Facebook, but offered a list of five reasons to be skeptical of the social media stock following this quarter's rare underperformance versus the S&P 500 Index (SPX). Included in the list are concerns over FB's video strategy, regulatory risk, and the amount of optimism already priced into the shares.

Sentiment is certainly skewed toward the bullish side, with all 27 analysts following Facebook maintaining a "buy" or better rating. Plus, the average 12-month price target of $208.21 stands well above the stock's current perch, as well as its Nov. 28 record high of $184.25.

This optimism is prevalent in Facebook's options pits, too. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have bought to open 141,469 calls over the past 10 days, compared to 70,483 puts. However, this rate of call buying relative to put buying is hardly unusual for FB options traders, as the corresponding call/put volume ratio ranks in the 65th annual percentile.

Drilling down, the January 2018 180-strike call is home to peak open interest of 94,901 contracts. Data from the major options exchanges confirms significant buy-to-open activity here, meaning options traders are betting on a move to record highs by the close on Friday, Jan. 19 -- when front-month options expire.

Elsewhere, short sellers have been abandoning their bearish bets at a rapid rate. Since mid-September, short interest on the stock is down 16% to 19.59 million shares -- the fewest since early July. Based on Facebook's average pace of trading, it would take roughly one day to cover these remaining shares.

It's not surprising to see such high expectations surrounding the FAANG stock, though. Year-to-date, Facebook shares have surged 55.3%, with all pullbacks confined by support from the equity's rising 80- and 120-day moving averages. However, it's certainly understandable why MoffettNathanson is concerned over the optimism levied toward FB, as it leaves little in the way of sideline cash available to help fuel future rallies.


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