The Nasdaq 100 sell program on Thursday knocked -170 points off the big cap index intraday with a 78-point loss at the close. The FANG stocks were the hardest hit but almost every stock in the index was crushed. Facebook was hit for a $9 loss intraday but rallied back to regain half of that by the close. Friday saw another decline in those stocks but the majority of the damage appears to be over. I want to take advantage of the drop in Facebook back to the 200-day average as a good entry point.

I don't want to add more than one play given the monster rally. We are due for some profit taking.


FB - Facebook - Company Profile

Facebook disappointed on guidance when they reported earnings for Q3. Earnings were $1.09 compared to estimates for 92 cents. Revenue was $7.01 billion compared to $6.92 billion. That was a 56% increase from the year ago quarter. Monthly active users rose to 1.79 billion and beat expectations for 1.76 billion. That was a gain of 80 million users. Daily active users rose to 1.18 billion and beat estimates for 1.16 billion. More than 1 billion daily users are mobile users. That accounted for $5.7 billion in revenue or 84% of its total ad revenue compared to 78% in the year ago period.

The problem came from the guidance. The CFO said revenue growth rates will decline in coming quarters. The reason is the number of ads already running called the "ad load." Facebook has run out of places to display ads because they are all booked. The company also said 2017 would be an "aggressive investment year" as they grow capex "substantially" and ramp up hiring.

Facebook still makes a lot of money and they still have a lot of assets to monetize. They have barely begun to monetize Instagram and WhatsApp. Facebook bought Instagram for $1 billion four years ago and Forbes said it was worth $25 to $50 billion today. Instagram has added 100 million users in the first nine months of 2016 to reach 400 million. They are targetign one billion. Instagram revenue is expected to triple in 2016 to $1.5 billion and then triple again to $5 billion by 2018 according to eMarketer.

Instagram only has 350 employees compared to the 14,500 Facebook employees. Instagram users average 21 minutes a day and upload more than 95 million photos and videos. There is gold in those posts and Facebook is working on finding more ways to monetize the app.

Facebook may expect revenue "growth" to slow but that is different from "decline." It is still a great business and there will be another explosion of growth as Instagram and WhatsApp hit their prime.

Shares fell to the 200-day average on Thursday and that has been support since mid 2013. I believe buyers will take advantage of the sharp decline in order to establish new positions. Facebook will rebound and it will set new highs. Those highs may not be in the near future but that does not mean we will not see a short term rebound.

Earnings Fed 1st.

The drop in price after earnings plus the decline in the Nasdaq big caps last week helped to reduce the premiums but they are still expensive and require a spread position to receive maximum benefit at the lowest cost.

Buy Jan 2018 $125 call, currently $13.50, no initial stop loss.
Sell short Jan 2018 $150 call, currently $5.05, no initial stop loss.
Net debit $8.45