Is it just a case of honeymoon jitters, or has the romance between Facebook and Wall Street ended forever?
Shares in the social networking giant fell below $30 for the first time Tuesday, as an onslaught of downbeat options trades and concerns about pricey acquisitions helped drive the stock to a closing price that was down 24 percent from where it debuted less than two weeks ago.
While some analysts remain bullish about the company's long-term prospects, others said Tuesday's decline, amounting to nearly 10 percent of Facebook's stock price in one day, underscores a continued backlash against the high expectations many set for the Menlo Park company before its May 18 initial public offering.
"There is no positive catalyst on the horizon," said Sam Hamadeh of the New York investment research company PrivCo. Noting that Facebook has already warned of slowing growth and other issues in its current fiscal quarter, he predicted the stock will continue to fall.
After launching with a record-setting market value of $104 billion, Facebook is now worth less than $80 billion. Adding to the bad news that has battered the company in recent days, Reuters reported Tuesday that U.S. antitrust regulators are planning a prolonged investigation of Facebook's proposed acquisition of photo-sharing company Instagram, which could delay the deal's completion.
The Instagram deal, which was personally engineered by Facebook CEO Mark Zuckerberg, had already raised eyebrows because of its $1 billion valuation -- although that value is shrinking because much of the deal involved Facebook stock. Instagram has just a handful of employees and virtually no revenue.
Even before the Instagram report surfaced, Facebook's stock closed Tuesday at $28.84, compared with its IPO price of $38. Analysts said investors may have reacted in part to unconfirmed reports over the weekend that Facebook was eyeing another potentially pricey acquisition, involving the Norwegian company Opera, which makes a Web browser for mobile devices.
While some said Facebook could use Opera to build its mobile ad business, analysts said the deal might cost $1 billion or more, particularly if Google (GOOG) or some other rival decides to bid up the price. Global Equities Research analyst Trip Chowdhry warned it would be a mistake for Facebook to narrow its focus on a single browser, when the company should be appealing to developers and users who rely on various software platforms from Google, Microsoft and Apple (AAPL).
An even bigger factor in Tuesday's stock slide, however, was probably the wave of bearish options contracts signed on the first day that such trading was allowed after the IPO. Options contracts, which allow investors to buy or sell stock at a fixed price in the future, essentially amount to a bet on what that price will be.
Investors were all over the map, betting on Facebook stock to hit future prices ranging from $16 to $65, as Reuters reported the volume of options set a record for a company making its trading debut. But the majority of trades bet on the share price continuing to fall, which most likely triggered more sales of the stock Tuesday, analysts said.
In the biggest single options transaction processed Tuesday, one investor essentially wagered that Facebook shares will hit $25 by late July, according to The Wall Street Journal.
PrivCo's Hamadeh said he expects Facebook shares to hit that level by the end of this year, while Chowdhry, who has repeatedly called the company overvalued, said he thinks a reasonable price might be in the $10 to $15 range.
But some veteran analysts remained upbeat about Facebook's long-term prospects. Bears are basing their bets on reports that Facebook will show less-than-expected growth in its current fiscal quarter, according to Michael Pachter of Wedbush Securities. Still, he's sticking to a $44 stock price target for next year, based on his projections for Facebook's growth in coming years.
"The options traders are saying in the near term that Facebook is not showing dramatic enough earnings growth to justify the current price, and that it's worth in the mid-20s," he said. While the stock could go that low in coming weeks, Pachter said, "I think it's worth a lot more. I think over the longer term, with 900 million users, Facebook has a lot more potential" to increase its revenue dramatically.
Other analysts have cautioned against reading too much into Facebook's early performance. They point to rocky debuts by other successful Internet giants including Amazon, which saw its stock plunge in the first weeks after it debuted at $18 in 1997. Amazon closed Tuesday at $214.75.
And in what might be viewed as another vote of confidence for Facebook's long-term business, the tech industry blog All Things D reported Tuesday that business software provider Salesforce.com is close to paying $800 million for a company that helps big companies market their brands on social networking sites. The company, Buddy Media, has focused most of its efforts on Facebook.
Mercury News staff writer Steve Johnson contributed to this report. Contact Brandon Bailey at firstname.lastname@example.org; follow him at Twitter.com/BrandonBailey.
How low can Facebook shares go?
In the biggest single options transaction processed Tuesday, one investor essentially wagered that Facebook shares will hit $25 by late July, according to the Wall Street Journal.
Facebook's price-to-earnings ratio, a common measure of investors' expectations for a company's future profits, is 62.70. Here are some comparable figures for other Silicon Valley companies: