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Getting bearish on Facebook shares

Facebook shares have fallen 24% from their IPO price, and traders are placing bets that the social networking firm's stock will erode further.

May 30, 2012|By Chad Terhune and Jessica Guynn, Los Angeles Times
  • Pedestrians are reflected in a window in New York near a display of Facebook's share price during the day's trading.
Pedestrians are reflected in a window in New York near a display of Facebook's… (Scott Eells, Bloomberg )

The bears are after Facebook Inc.

Shares of the social networking giant continued a precipitous plunge since the company's much-hyped initial public offering. The stock notched a 10% drop Tuesday and has lost about a quarter of its value since going public May 18.

Facebook is now trading below $29, a stunning drop for the biggest tech IPO in history. And traders are placing bets that the stock will erode further.

"It's been a one-way ride so far, and it's hard to say if the stock has hit bottom," said William Lefkowitz, chief options strategist at VFinance Inc. in New York.

Much of the slide Tuesday was because of a rush of options traders coming into the market. These trades offered investors a new way to speculate on the rise or fall of the company's shares, and most of the bets indicated more drops are ahead.

In the first day for Facebook options, the bearish puts outnumbered calls by 1.26 to 1, said Brian Overby, a senior options analyst at online brokerage TradeKing of Florida. Facebook debuted as the second-most actively traded option behind Apple Inc. with 366,409 total contracts.

Put options grant investors the right to sell the stock at a predetermined price, while call options give owners the right to buy a stock at a preset price.

"It's giving people another way to short the stock, and you are seeing people jump on it," Overby said. "The options market can drive the actual stock price."

Indeed, the flood of options trading pressured the stock. Facebook tumbled $3.07, or 9.6%, Tuesday to $28.84. It marks a 24% plunge from the IPO price.

The drop brings up the big question Wall Street's been asking: How low can it go? The answer might not be known for a while.

Analysts said that there were a variety of option-trading strategies at work on Facebook and that it probably would take several days to get a better read on whether the bearish sentiment would stick. Monthly option contracts started trading Tuesday, while weekly contracts begin Thursday.

"Some of these investors might say the selling is overdone and let's look at a turnaround," Lefkowitz said. "It's hard to read into the current activity and figure out what investors are really thinking."

Some market watchers expect Facebook shares to settle into a range after the company reports earnings in late July. Others say the volatility will last much longer because the social network continues to operate like a tech start-up that's not beholden to Wall Street's focus on short-term results.

The stock has also notched lower as some have worried about Facebook's strategy. There were reports over the weekend that the Menlo Park, Calif., company was eyeing the acquisition of Norway's Opera Software, a Web-browser developer.

Spokesmen for Facebook and Opera declined to comment. In April, Facebook surprised some analysts by spending $1 billion to acquire Instagram, a photo-sharing company.

"Most companies are managing the business to produce relatively smooth and relatively predictable results for their investors," said Brian Wieser, a senior analyst at Pivotal Research Group in New York, who has a "sell" rating on the company and a $30 price target. "That is not the case with Facebook. People should expect volatility from an operations and stock perspective."

While Wall Street is guessing wildly about where Facebook's shares go from here, the mood inside the tech giant appears to be a bit more composed.

"Everyone is just going about their regular business here," said one employee who was not authorized to speak publicly.

On the day Facebook filed for its IPO in February, Facebook founder and Chief Executive Mark Zuckerberg posted a photograph of a sign on his desk that read "stay focused & keep shipping."

And some employees may take the stock swoon in stride since Facebook allowed employees to cash in some of their holdings through the secondary markets prior to the IPO.

"Mark has done a really good job at getting people not to focus on Wall Street," said a person familiar with the company who spoke on the condition of anonymity to preserve his relationship with Facebook. "Facebook has always been very long-term-focused company."

chad.terhune@latimes.com

jessica.guynn@latimes.com

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