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Making money in social media stocks

By Matein Khalid

The brutal correction in NASDAQ last week did not spare such former tech sector darlings as cloud software, semiconductors and social media shares. The Big Daddy of social media is Facebook (symbol FB) and its shares were slammed by $19 on NASDAQ to $262 or $42 below its recent high. Even though Facebook beat the Street’s EPS whisper number, its CFO confessed that member count had declined in the US/Canada and the data privacy/regulatory Gestapo is once again on the warpath. This was bearish for the shares at a time when the stock market is skittish about a contested election, the lack of any Big Bang fiscal stimulus and mediocre revenue guidance by Microsoft and Apple.

Yet FB’s platforms – Facebook app, Messenger, Instagram and WhatsApp – now boast 3.21 billion monthly users worldwide. Mark Zuckerberg has thus created one of history’s perpetual money making machines and the COVID pandemic/holiday season will make Facebook the only credible life jacket for drowning retailers across the Milky Way. Asia added a record 30 million new members in the 3Q. Oculus/5G makes virtual reality the next big thing to goose Facebook’s user engagement metrics. With a market cap of $749 billion, Facebook trades at a not unreasonable valuation of 25 times earnings. While I would ideally prefer to buy shares below $230, the stock market may not give me that chance.

True I bought Facebook shares at $19.75 just after its flop IPO in 2013. I have witnessed its spectacular ascent to become a member of the fabled FANG club on NASDAQ. A potential bullish strategy now would be to sell June 2021 FB put options on the CBOE at a strike price of 270. Due to a spike in volatility the 270 FB put option generate a $42,000 return for every 1000 shares in notional exposure. This means that the worst possible scenario in this strategy is that I own Facebook shares next June at 228, where I believe the risk reward calculus is disproportionately in my favour. I live in the second derivative and view life through the prism of volatility, deltas, gamma risk and exponential time decay (the theta curve).

Twitter (TWTR) was gutted by 21% in a single session on panic selling that user growth will plunge if Donald Trump, its de facto brand ambassador loses the election. The 3Q user growth metric disappointed Wall Street. The loss of its notorious Tweeter-in-Chief could mean another ghastly slide in the shares, whose valuation is not exactly cheap. Trump has 87.3 million followers and is a global magnet for new users even though he and Jack Dorsey hate each other. While Pinterest added 26 million new users in the 3Q, Twitter’s user add was a shockingly low 1 million even Snap added 10 times this amount. If Trump loses the election the shares could fall to 30, where I would be a potential bottom fisher.

Alphabet (GOOGL) was the Cinderella of FANG in 2020 but a relative safe haven from Ursa Maxima last week. 3Q earnings blew away the Street’s whisper number. Google shares of a compelling value below 1560 or 22 times earnings. The global search ad market has recovered from its summer malaise and YouTube is on fire, as is the embryonic Google Cloud business. The Justice Department antitrust lawsuit and the resurgence of the Coronavirus pandemic are both Achilles heels for the bullish Google trade. Traffic acquisition cost have also risen and operating expenses need to be cut. I can well envision Google trades in a 1400 to 1900 range next year. This gives vast opportunities to design and implement highly profitable option trading strategies on Google now that the Volatility Index (VIX) Wall Street’s pendulum of greed and fear has moved about 40 in a predictable risk aversion spasm. Red or Blue, America, I still love you!

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