Facebook makes a comeback, options volume soars

Thu May 31, 2012 6:14pm EDT

Facebook logos on a computer screen are seen in this photo illustration taken in Lavigny May 16, 2012. REUTERS/Valentin Flauraud

Facebook logos on a computer screen are seen in this photo illustration taken in Lavigny May 16, 2012.

Credit: Reuters/Valentin Flauraud

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(Reuters) - Facebook Inc bounced back from record lows in frenetic trading on Thursday to finish in positive territory for the first time in four days, lifted in late trade by a U.S. market rebound and a brokerage upgrade.

Facebook, the No. 1 Internet social network and first U.S. company to debut with a capitalization of more than $100 billion, rose 5 percent to close at $29.60. Options volume skyrocketed with bets ranging from a sharp rebound to a sustained selloff, promising more volatility to come.

Facebook remains 22 percent below its $38 IPO price, walloped by doubts about its lofty valuation and ability to sustain the rapid growth that has made it a business and cultural phenomenon.

On Thursday, Pivotal Research analyst Brian Wiesner -- among the first to slap a "sell" rating on the stock -- upgraded the shares to hold, arguing that the current price incorporated much of the inherent risk in Facebook's business.

"Short-term we are still cautious but there should be reasons for optimism later this year and next," said Wiesner, who put a sell on the stock when Facebook first priced its IPO.

Wall Street remains concerned that Facebook, while boasting nearly a billion users worldwide and dominating Internet social networking, will have difficulty translating its growing presence on smartphones and other mobile devices into revenue.

Analysts say wringing profits from smartphone users is crucial to long-term growth, particularly with rivals Google Inc and Apple Inc dominating the mobile arena.

The current weakness "feels a lot like it's macro-driven as much as anything," Wieser said. By late 2012, "Facebook will by then have cycled through difficult comps and investors can better focus on the fundamental growth story."

U.S. stocks fell on Thursday. The S&P 500 ended May with its largest monthly drop since September, as investors focused on European credit problems.

Before their late bounce, Facebook shares had sunk to a record low of $26.83, representing a loss of about $30 billion in market value since a botched May 18 initial public offering.

Earlier on Thursday, S&P Capital IQ cut its target on the stock to $27 from $30 and maintained a "sell" rating. The company debuted at $38.

Facebook's $16 billion IPO punctuated years of breakneck growth for a social network born eight years ago in Mark Zuckerberg's Harvard dorm room. But the offering was plagued with problems.

A software error on Nasdaq OMX Group Inc's U.S. exchange delayed the start of trade by 30 minutes. Then, claims of selective disclosure about slowing growth in the days leading up to the IPO engulfed the company in controversy, as did perceptions among some investors that the stock was overpriced coming out the gate.

APPLE-LIKE NUMBERS

Skeptics had argued even before the botched debut and subsequent selloff that the starting valuation of more than $100 billion -- equivalent to that of Amazon.com Inc and exceeding that of Hewlett-Packard Co and Dell Inc combined -- was too high for a company that posted $1 billion in profit on revenue of $3.7 billion in 2011.

The stock debuted at over 100 times historical earnings versus Apple's 14 times. Despite that, many investors bet on a modest first-day pop in the stock.

On Thursday, Wall Street may have taken a few cues from the days-old market for Facebook options, which began trading only Tuesday but already rival volumes in Apple Inc, traditionally one of the busiest equity option contracts.

At the closing bell, option traders exchanged 203,000 puts and 182,000 calls in Facebook, yielding a put-to-call ratio of 1.12, according to options analytics firm Trade Alert.

Contracts exist all the way down to a strike price of $5, or up to $65 as far out as January 2014.

The activity highlighted a wide divergence of opinion, with some betting on a rebound while others expect a sustained selloff, analysts say.

"Today is the first day they brought the weekly options that expire next Friday and they are tremendously active," said William Lefkowitz, options strategist at brokerage firm vFinance Investments in New York.

"In general, investors are still expecting volatility in the shares. With options you can go long or short the stock at the fraction of the cost of buying or selling the underlying shares."

(Reporting By Edwin Chan and Doris Frankel; Editing by Jeffrey Benkoe and Steve Orlofsky)

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Comments (4)
Slammy wrote:
Since the .com revolution began many companies have tried and failed to figure out how to make from content based web sites(which is what facebook mostly is). Having been one these early pioneers ten+ years ago, it gives me relief to know that the question of how to make tons of money from content sites remains elusive.
However, with a billion users, there is defiantly value there. In my opinion they are approaching the problem from the wrong angle. Instead of placing a low value income value on every user, they should focus on the users who want to spend money and/or can benefit from the product placements Facebook is promoting. I think targeted ads/services to those who need them is the right approach.

May 31, 2012 1:20pm EDT  --  Report as abuse
Willfer65 wrote:
I do not know why the analysts took so long to determine the FB stock should be worth from 7 usd to 20 usd (articles in recent days). why nobody said anything to the public (small investors)? Was is planned not to do so until the IPO was placed? Didn’t they had the information available since many months ago as to make an estimate before the IPO was issued? It will make a good article to investigate who these analysts work for, who is making money with this deal, and why nobody said anything until now. Anyway I would never invest in a business which revenue improves proportionally to the amount of people wasting their time.

May 31, 2012 2:45pm EDT  --  Report as abuse
Geek_News wrote:
Wow talk about some serious overhype there, a small move over a single day is hardly a comeback. More like bargain hunters and initial investors looking to keep it for falling further. There is no way FB should have ever had the valuations it was receiving. Most everyone outside the tech world and the “popular” vote saw that. The company trades on nothing but its user base, their information and their “potential” usership. For that they should be trading around $10-15 and that would be reasonable.

May 31, 2012 6:48pm EDT  --  Report as abuse
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