Facebook Tops Whisper, Why The Stock Could Drop

Jan.30.14 | About: Facebook (FB)

Facebook (NASDAQ:FB) reported earnings after the market closed on Wednesday. The company beat Wall Street profit estimates by four cents a share, and topped the expectation from WhisperNumber.com by two cents. The beat was not much of a surprise as Facebook has either topped or met the whisper number in all six of its earnings reports since it went public in 2012.

The company posted a 63% increase in revenue and an eightfold increase in profit for the fourth quarter. In after hours trading last night the stock surged over 12%, and pre-market gains added another 6%. But the 'good news related' after hours/pre-market strength may start to give back some.

The following table shows Facebook's reported earnings per share over the past six quarters alongside the whisper number expectation from contributing investors and traders.

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Our primary focus is on post-earnings price movement. In other words, we look at what happens when the company beats or misses the whisper number expectation. This price movement analysis has been confirmed through our 15-year track record, and by multiple independent academic studies that show whisper numbers provide greater returns when used as an investment vehicle, and have a greater impact on stock movement than analysts' consensus estimates.

The company has now reported earnings ahead of the whisper number in three of the past four quarters. In the comparable quarter last year the company reported earnings in line with the whisper number. Following that report the stock realized a 6.3% loss in five trading days (intra-day). Last quarter the company reported earnings four cents ahead of the whisper number. Following that report the stock realized a 6.2% gain in one trading day before turning and seeing a 5.2% loss in twenty trading days.

The table below indicates the average post earnings (intra-day) price movement for Facebook within a one and thirty trading day time frame:

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The strongest average price move of -7.4% comes within twenty trading days when the company reports earnings that beat the whisper number. With the exception of a positive price move in one trading day, the overall average price move is 'negative' when the company reports earnings. While it's reasonable to expect Facebook's stock price will see a positive price move today, it may start giving back some of the recent gains over the next thirty trading days, despite posting positive earnings.

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Since 1998, WhisperNumber.com has been tracking and publishing 'crowd sourced estimates' for earnings. We call these earnings expectations whisper numbers. Our whisper numbers are gained from individual investors and traders just like you that have registered with our site. While the whisper number itself is an important part of our analysis, a company's 'price reaction' to beating or missing the whisper number expectation is the key. On average, companies that exceed the whisper are 'rewarded', while companies that miss are 'punished' following an earnings report. Trading on whispers is a technical play on market psychology, rather than a bet on a company's fundamental strengths.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.