Facebook Earnings Woes Give Way to Stock Options
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As the dust settles from Facebook’s (NASDAQ: FB) disappointing second quarter earnings report, investors seem to be weighing their options for the stock. When I say options, I’m not referring to trying to choose whether or not to buy or sell the stock now that it is trading just above $23. I am referring to stock options, which are being actively traded for Facebook.
At one point on Monday, roughly 9,500 August 25 puts had been bought against open interest of 5,515 contracts. Investors paid $1.40 to $1.50. By contrast, almost 7,400 August 25 calls were bought against open interest of almost 4,000 contracts. As far as the calls are concerned, the considerable amount of open interest is good because it often indicates there is more liquidity for the call option being traded.
Considering the problems Facebook has had monetizing its mobile users, it was not a question among many about whether or not the social network giant would miss earnings. It was more of a matter of by how much. The writing was on the wall when Zynga (NASDAQ: ZNGA), one of the main sources of revenue for Facebook, announced that it had horridly missed Wall Street estimates.
The maker of popular games like FarmVille, which are played on Facebook, reported earnings of $322 million for the second quarter, which was less than the $344 million Wall Street analysts had expected. When explaining its earnings, Zynga officials squarely placed some of the blame on Facebook.
Facebook gets roughly 18% of its revenues from Zynga. After Zynga’s earnings numbers came out, Facebook’s shares dropped 8%, and they haven’t recovered since. Zynga's shares shed more than three-fourths of their value immediately after it reported earnings.
Facebook’s bad earning news was briefly overshadowed by rumors that it was in the midst of developing its own smartphone with HTC, and that it could debut next year. However, Facebook CEO Mark Zuckerberg quashed that idea last week, saying making a smartphone wouldn’t make sense for the company right now.
I beg to differ. Armed with its own phone, Facebook would be positioned to better compete on all levels with its main peers, especially Google (NASDAQ: GOOG). Google is solidifying its position as the ultimate communications giant, offering everything from its own tablet, operating system and of course its lucrative Internet search engine.
Facebook’s revenues have been under pressure for months, and the company all but spelled it out in May before it went public. An amended S-1 filed a week before its infamous IPO noted that the number of its mobile subscribers was outstripping the number of ads on its mobile platform. This has made it difficult for the company to monetize its mobile subscribers. Like you’ve probably heard numerous times, mobile is the way to go for consumers, and companies that fail to fully take advantage of this market through advertising will suffer.
Such seems to be the case with Facebook. However, the company, determined to dominate, is trying to be open and ready to make the necessary changes to stay competitive. Unfortunately, its intentions often tick off its subscribers. For example, it launched a self-serve, advertising platform called sponsored stories earlier this year. This was key because it allows businesses that may have found it too expensive to advertise on Facebook to be able to do so for a lower cost. Some subscribers cried foul over the way the service was offered, saying it violated their privacy. Facebook had to settle with them for $10 million in June.
Display ads make up another area that affects Facebook’s financials. Facebook made an impressive run to the top of the list in terms of sales from display advertising business, outdoing Yahoo (NASDAQ: YHOO), which was number one in 2008, Microsoft and AOL. However, now Google is set to surpass Facebook by next year. According to eMarketer, Facebook had 14% of the market in 2011 with $1.73 billion in sales. Google’s share totaled 13.8% with $1.71 billion. Facebook continues to dominate this year, but next year, Google is expected to have 20% of the market, while Facebook will have about 18% of it. eMarketer expects the sales to be $3.68 billion and $3.29 billion respectively. So you can see how quickly things can change when it comes to this huge revenue generator, and how Facebook is being adversely affected.
The street expects Facebook to earn $.12 a share on $1.16 billion in revenue. Let’s keep in mind that for 2011, its revenues were roughly $3.7 billion. With the knowledge of the issues surrounding Facebook’s monetizing of its mobile subscribers, Q2 estimates had been lowered. Facebook’s results may miss estimates, but they won’t disappoint many who are long-term investors. If the mobile phone comes to fruition, it will be just one more way the company can become more diverse and increase shareholder value.
TwillyD has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook, Google, and Microsoft. Motley Fool newsletter services recommend Facebook, Google, Microsoft, and Yahoo!. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.