Trade Alert – Facebook rocks, so you know what to do now

And where do we go from here?
Which is the way that’s clear?
Still looking for that blue jean baby queen,
Hey, kid, rock ‘n’ roll, rock on – Rock on, David Essex (1973)

Wow, what a move we’ve had in the markets, in our portfolios and in Facebook lately huh? First things first, I want you to try to remember just how horrible it felt when Facebook was at $18 a share and we were aggressively buying common and calls it. Remember how nice it was when Facebook popped after its prior earnings report three months ago and then how it faded lower every week after the pop. Remember how scared you were back when the markets were in the tank last summer and those silly Euro-debt crisis headlines dominated the major news outlets.

I think I’m well established as one of the biggest Facebook bulls since we first started scaling into the stock in the mid-$20s after it crashed post-IPO. I’ve been repeatedly out there talking about how I’ve been trading Facebook — buying common and/or calls on weakness and trimming those on pops. Just a few weeks ago in a “Cody’s Latest Positions” post on TradingWithCody.com, I wrote about how I expect the stock to rally to $40 by the end of the year.

The playbook hasn’t changed. Trim on pops, is what it says, right? So do it. Your job now is to sell euphoria (especially your own) and later it will be to buy panic (especially your own). You can only do the latter if you’ve been flexible enough to do the former.

I’ve got a lot of common Facebook stock and quite a few Facebook call options on the sheets.  So here’s what we do. We sell the calls that have the lowest-priced strikes and the most close to expiring. I’ve even still got a lot of those Facebook call options with $30 or so strike prices that expire in January 2014, courtesy of several tranche buys over the past year and those are probably the ones I’ll mostly keep. Facebook common remains on the sheets and I will look to get out of the rest of my Facebook call options on further pops, especially if the stock rallies up closer to my aforementioned $40 year-end price target.

With the trading strategies and tactics out of the way, let’s talk about just how good that FB quarter was and just how good the earnings reports could be in two or three years.

When Facebook first came public the biggest knock against it was that the company hadn’t figured out how to monetize web users very well and that they had no mobile revenue to speak of. Last night’s quarterly report showed the company is now on track to get 10 cents per share per user per year. That’s up from a penny just a couple years ago, but still very, very far from potential.

Take a look at these estimate bumps for Facebook from .

• 2013 ad revs of $6.4 bn (was $5.5 bn), total revs of $7.4 bn (was $6.4 bn), adjusted EBITDA of $4.1 bn (was $3.2 bn) and EPS of $0.72 (was $0.50).
• 2014 ad revs of $8.2 bn (was $6.5 bn), total revs of $9.3 bn (was $7.4 bn), adjusted EBITDA of $5.0 bn (was $3.6 bn) and EPS of $0.88 (was $0.52).
• 2015 ad revs of $9.7 bn (was $7.2 bn), total revs of $10.9 bn (was $8.2 bn), adjusted EBITDA of $5.9 bn (was $3.9 bn) and EPS of $1.06 (was $0.55).

See that nearly 50% increase overnight in 2015 revenue estimates? That’s why the stock is up 25% today. And revenue from mobile made up 41% of total ad revenue, up from 30% in the prior quarter.

As for looking two or three years out? As I wrote last month, “The key to Facebook really is that they have to figure out how to generate 5 cents per user per day in sales to generate $18 billion in sales in three or four years, up from the $5 billion in sales they reported last year. That would likely generate up to $3 or more in earnings and if Facebook can deliver that in the next few years, we’ll be sitting on a $80-100 stock.” I still think that’s the case.

But we trim our call options today.

Two other trades to mention here. I’m buying some VIX call options with September expirations and strikes around $13-14 to further hedge the overall portfolio with some volatility upside while the VIX is back at historically low levels. I’m also selling the last of my Marvell common. Marvell’s biggest customers are Western Digital and Seagate and both are showing inventory build ups and growth moderation. We’ve got nice profits in this Marvell stock since buying it in the single digits a few months ago. Moving on.

Rock on.