Facebook is the world's largest social networking website, with 1.5 billion monthly active users worldwide, or 50% global penetration.
KEY RISKS
■ Competition from major Internet and software providers. Facebook competes with large established companies such as Google and Microsoft, while start-ups like Pinterest and Twitter will also compete for advertising and services.
■ Government regulation of privacy and user data. Privacy restrictions could make it more difficult for Facebook to track user data, which would limit its effectiveness for advertisers.
With a market capitalization of $320 billion, FB is valuing those monthly active users at over $200. Back in its heyday, the original social media website, Myspace, was valued at $10 per user. Both websites were derived from related ideas, not social media per se. We see the barriers to entry in this space extremely low. Only public opinion,(which has run amok in the GOP) creates a short term premium.
FB trades at a lofty 15x 2015 revenue. Its peers in the mega cap tech growth space, Microsoft and Amazon both trade at less than 5x. Both of those competitors have strong consumer ties, and can easily spend to grow in the social media space as well. Also, with the private funds full of unicorns, who's to say that competition isn't only a click away?
TRADE
The trade is to sell the JAN 2017 120/100 1x2 Put spread for $1.50 credit. We like the extra vega of the ratio spread here as any change in FANG valuations should be drastic. We like the time as is gives us almost a full earnings cycle across IT spend and consumer demand.