Can Facebook Earn A Thumbs Up With Q2 Earnings?

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Includes: AAPL, FB, LNKD, MSFT, TWTR
by: TD Ameritrade

Summary

TWTR has enjoyed a 30% rally since early June, when MSFT announced its $26.2 billion acquisition of LNKD.

Ahead of the earnings Monday, BGC analyst Colin Gillis gave AApl stock a sell rating, downgrading from a hold.

Many analysts are optimistic about FB’s revenues, which they think will rise 50% as advertising growth and higher-cost ads are projected to power the top line.

By Kevin Hincks, Sr. Specialist, Trader Education Host and Swim Lessons Host, TD Ameritrade

This is a busy week for earnings season and some of the biggest corporate titans are coming out with results. Are you ready? Brace for a whopping 1,266 firms reporting; 497 on them on Thursday alone.

Two technology giants are on tap Tuesday after the markets close and another one on Wednesday, ahead of the bell: Twitter (NYSE:TWTR), Apple (NASDAQ:AAPL) and Facebook (NASDAQ:FB). What innovations are these social media and technology disruptors up to now?

What's the Link Between TWTR and LNKD?

TWTR has enjoyed a 30% rally since early June, when Microsoft (NASDAQ:MSFT) announced its $26.2 billion acquisition of LinkedIn (NYSE:LNKD). Where's the, well, link? Some traders were thinking that if social media was in a consolidation mode, TWTR might be next. But there's been no deal.

"And while a deal is always possible, TWTR's recent rebound ignores many of the fundamental issues pressuring it today: Its user base is slowing, its revenue isn't growing as rapidly as it used to, and its advertising business is underwhelming," according to the Wall Street Journal.

When TWTR reports after the bell Tuesday, analysts reporting to Thomson Reuters are well aware of these fundamental issues. But have they priced in the company's challenges or are expectations too optimistic? Analysts are expecting per-share earnings of $0.10 on revenue of $607 million, up 21% but lower than in previous quarters.

Analysts will be listening to future guidance, particularly as it refers to the live-streaming contracts the company recently made with Major League Baseball and the National Football League. They also want to hear how changes that allow longer video and more content are faring.

Short-term options traders have priced in a potential 9.5% share price move in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim®platform by TD Ameritrade.

Ahead of earnings, options trading was active in the 17- and 18.5-strike puts and the 19-strike calls, with volume at two to three times the normal rate. The {{implied volatility}} is at the 113th percentile. (Please remember past performance is no guarantee of future results.)

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.

Figure 1: Trending Higher since Last Quarter. TWTR shares were fell to new lows after last quarter, but found support near $14 and have since rebounded to near $19. Chart source: thinkorswim® by TD Ameritrade. Data source: Standard & Poor's. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Is AAPL Sweet or Sour?

Listening to the analysts who cover AAPL, an investor may not know where to turn. Ahead of the earnings Monday, BGC analyst Colin Gillis gave the stock a sell rating, downgrading from a hold, noting that it "has become clear that the muse that drove Apple has gone somewhere else." He said later on CNBC that the iPhone7 sales will be disappointing and lead to a downturn in total sales and profits.

But AAPL defenders came out in force. Piper Jaffray's Gene Munster thinks the iPhone7 sales will drive growth because about 75% of AAPL iPhone users have smartphones that are two years old and ready for an upgrade. Cowen Managing Director Timothy Arcuri thinks much the same, noting his number is 70 million users with old iPhones. He thinks investors will breathe a sigh of relief when the iPhone7 comes out because of stronger sales and noted users will be thrilled with the next iteration, out in 2018. The shipments don't come out until September, but remember the last quarter saw the first decline in iPhone shipments ever.

Analysts reporting to Thomson Reuters are forecasting a per-share profit of $1.38, down from $1.85 a year ago. Total sales are seen slipping to $42.1 billion from $49.6 billion a year ago. They will also want to hear about plans for Bob Mansfield, the highly regarded senior executive AAPL has pulled back into the ranks to head up its fledgling auto project.

Short-term options traders have priced in a potential share-price move of 3.5% in either direction around the earnings release, according to the Market Maker Move indicator.

Ahead of earnings, option trading was active in the 95-strike puts and the 100-strike calls. The implied volatility is at the 44th percentile.

Figure 2: Working the Range. AAPL shares have zigged and zagged in a range between about $92 and $100 since the last earnings report. Chart source: thinkorswim® by TD Ameritrade. Data source: Standard & Poor's. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Can FB Keep Firing on All Cylinders?

Many analysts are optimistic about FB's revenues, which they think will rise 50% as advertising growth and higher-cost ads are projected to power the top line. They're also jazzed by the 15% year-over-year growth in active monthly users to 1.65 billion that FB reported in Q1 and expect will be higher this quarter. Monness Crespi Hardt analyst James Cakmak sees a 4% jump in active monthly users from the last quarter. And then there are the gains in Instagram, Oculus VR, Facebook Messenger, and mobile usage that they're looking to see.

Analysts at Thomson Reuters are looking for per-share profit that would be a 62% year-over-year jump to $0.81 a share. Revenue is expected to grow by about 50% to $6 billion. FB has outpaced analysts' earnings expectations for 14 of the last 15 quarters.

Short-term options traders are anticipating a potential 8% share price move in either direction around the earnings release, according to the Market Maker Move.

Ahead of earnings, there was active trading in calls and puts at the 121-strike. Elsewhere in the options market, there was active trading in the 117-strike puts and the 125- and 126-strike calls. The implied volatility is at the 67th percentile.

Figure 3: Pushing through new highs. FB shares recently notched a new high at $122.20, slightly above prior highs that were reached following the company's last earnings report. Chart source: thinkorswim® by TD Ameritrade. Data source: Standard & Poor's. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

Disclosure: I/we 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. I have no business relationship with any company whose stock is mentioned in this article.