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.
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."