Facebook: Stock Rips On Earnings, But Nobody Gets the Volatility

Facebook, Inc. (FB), is engaged in building products to create utility for users, developers, and advertisers. People use Facebook to stay connected with their friends and family, to discover what is going on in the world around them, and to share and express what matters to them to the people they care about.

As I’m sure we all by now, the catalyst was quite simply earnings. FB made a big bet that mobile ads were the next big thing, and in the face of some hefty criticism Mark Zuckerberg was proven right… to the tune of a 30% gap up on earnings. Not only were revenues and profits higher than expected, but cost savings through synergies that bet on the mobile ad world also kicked in. In terms of a management grade, this bet was a screaming A+ so far.

But I want to talk about the volatility, b/c I think there’s something here that is going unnoticed. Let's start with the one-year FB Charts Tab below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the downward spiral the stock realized post IPO, including that nasty gap down after its first earnings release as a public company. But since then there has been a recovery, noted most spectacularly by the earnings move on Thursday.

But let’s look at the vol in isolation. I have included a one-year IV30™ chart below.

We can see the hypnotic ebbs and flows (actually flows and ebbs) into and out of earnings. Note that for each of the last four earnings cycles (which is all of them), that the vol peak was lower monotonically (the blue “E” icons represent earnings dates).

This monotonic vol decrease into earnings is the first vol phenomenon I noticed. FB’s first earnings release was a major unknown post IPO, but since then the firm has not been less risky (IMHO), rather more risky with several questions about the firm’s future and projections. I’ve seen research reports which stated that FB would need 100 billion users to reach the sales figures that justify their P/E (and that’s before this pop on Thursday). Considering there are only 6.6 billion people in the world, I’m guessing FB will not reach 100 billion users (and yes, I know businesses use FB too – don’t be like that).

The news today points to how much we don’t know about FB. That’s not (necessarily) a reflection of opaque financial reporting, it’s simply a reality that no one has ever seen a social media site this big. We have no idea where it’s going. We have no idea if Mark Zuckerberg is right. He doesn’t even know if he’s right (but he was right last quarter, that’s for sure).

The company has a P/E higher than 99% of the S&P 500 – I read that in a Bloomberg News article written by David De Jong in New York. All of this leads to me to simple question, forget earnings vol crushes and stuff, why is the volatility systematically getting lower? I have no idea.
But there’s even more… Let’s turn to the Skew Tab, below.

We can see I have included seven expiries on this chart – weeklies and monthlies. The incredible phenomenon here is that there is a monotonic decrease in vol as we go further out. Or, said differently, the option market continues to reflect lower risk in FB shares in the future. I just don’t get that… And judging from this earnings release, no one else does either.

If you have thoughts on FB and the rip roaring success of earings and the volatility, there is an open thread right now on the Livevol Community. Tell the community what you think.

Disclosure: This is trade analysis, not a recommendation.

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