Facebook shares plumb new depths, valuation questioned

Tue May 29, 2012 11:30pm BST

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* Shares drop 10 pct, below $29

* Options begin trading, prove tempting alternative

* Opera acquisition talk surfaces

(Adds analyst's comments, market action)

By Alistair Barr and Edwin Chan

SAN FRANCISCO, May 29 (Reuters) - Facebook Inc (FB.O) shares slid below $29 to a new low on Tuesday as nervous investors fled the company's shares, concerned about the social network's long-term business prospects and an initial offering price that proved too rich.

Shares of the No. 1 social network fell 10 percent to an all-time low of $28.65, before recovering slightly to $29.01. Since its market debut on May 18, the eight-year-old company has shed approximately $25 billion in value -- roughly equivalent to the market capitalization of Morgan Stanley (MS.N), the lead underwriter of Facebook's IPO.

Wall Street has harbored concerns that Facebook, while boasting nearly a billion users worldwide and dominating Internet social-networking, would have difficulty translating its growing presence on smartphones and other mobile devices into revenue. Rivals Google Inc (GOOG.O) and Apple Inc (AAPL.O) are currently more dominant in the mobile arena.

The increasing urgency of Facebook's quest to monetize mobile is spurring widespread speculation over its next moves. Technology bankers say the company will benefit from tacking on mobile operating software through an acquisition of Norway's Opera (OPERA.OL), which has been on the auction block for a while.

The New York Times over the weekend also cited sources dredging up a longstanding rumor that Zuckerberg was pondering building a Facebook phone, with the new wrinkle that an easy way to acquire the hardware expertise needed was to buy troubled Research in Motion RIM.TO.

Analysts say apart from the challenge of earning money off smartphone and tablet users, Facebook -- which relies on advertising for the majority of its revenue -- may also find it difficult to lure large advertisers.

Days before Facebook's market debut, General Motors announced it was pulling out of paid advertising on the social network, citing Facebook's unproven track record and echoing potential concerns about the lack of evidence that advertising on Facebook yielded strong returns on investment.

"Facebook is in a transition in their business model," Walter Price, portfolio manager of the Wells Fargo Advantage Specialized Technology Fund, told Reuters Insider. "It was easy to get the first 5 to 10 percent of an advertising budget to try it on Facebook and do some brand advertising, but getting the next 5 to 10 percent, you've got to displace TV and that's a lot more difficult to do.

"Facebook still doesn't have the metrics to prove profitability and prove growth and awareness from their platform," he added.

A software error on Nasdaq OMX Group Inc's (NDAQ.O) U.S. exchange delayed the start of trade by 30 minutes on Facebook's first day of trading, which was to have been the culmination of breakneck growth for the cultural and Internet phenomenon.

Instead, claims of selective disclosure in the days leading up to the IPO about Facebook's slowing revenue growth engulfed the company in controversy, as did perceptions among some investors that the stock had been overpriced coming out the gate. [ID:nL1E8GO0AU]

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

Facebook stock debuted at over 100 times historical earnings versus Apple's 14 times. Despite that, many investors bet on a modest first-day pop for the company, which upended traditional technology and business models and is used by about one in seven people on the planet. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ INSIGHT-Nasdaq chaos engulfed Facebook IPO [ID:nL1E8GP72W] Facebook option volume explodes [ID:nL1E8GT59Y] Opera would cost Facebook over $1 bln [ID:nL5E8GT2I7] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

TEMPTING OPTION

Facebook options began trading on Tuesday, presenting a tempting target as more investors bet the underlying stock would head south. They piled into put and call options -- granting investors the right to sell or buy stock at a certain price -- marking one of the busiest debuts ever in the options market. [ID:nL1E8GTBK6]

Janet Tavakoli, president of Tavakoli Structured Finance Inc in Chicago, said she bought puts expiring in September with a strike price of $25, at a cost of $210 per contract, -- with each contract representing 100 shares.

“The valuation is a complete bluff. There is still a long way to go down from here," she said. "There will be insiders selling their shares on Aug. 20, when the first lockout period is over. There will be a lot of shares that will hit the market and more in coming months."

Vague talk about Facebook's next moves may also be giving some pause. Rumors that the company may be considering acquiring Opera pushed the Oslo-listed shares up more than 26 percent on Tuesday.

Analysts say the mobile-phone software maker could prove a crucial component in Facebook's still-patchy strategy to earn revenue from smartphones, but it could carry a price tag of as high as $1 billion.

Many Wall Street analysts had been concerned about the apparent hastiness with which Facebook concluded its $1 billion purchase of photo-sharing service Instagram, though Zuckerberg later said it had been considered for months.

Others worry about how Zuckerberg commands more than half of the company's voting shares through agreements with other investors.

"We’ve been talking about a $50 billion valuation as one that makes sense, I think that would be a stock price around $20," Price said. But "the infrastructure that Facebook is building, and the fact that they have many advertisers that have built followers and fans on their platform, gives them a base to build a great business."

(Additional reporting by Doris Frankel and Angela Moon in New York; Writing by Edwin Chan; Editing by Matthew Lewis and Steve Orlofsky)

((eddie.chan@thomsonreuters.com)(+1 415 677 2533)(Reuters Messaging: eddie.chan.reuters.com@reuters.net)) Keywords: FACEBOOK SHARES/

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