Facebook Stock Freefall: How Low Can It Go?

4:35 PM PST 05/29/2012 by Paul Bond
Facebook

Shares falls 10 percent after the holiday weekend, leaving some analysts predicting further drops.

Facebook shares hit a new low in the company's young history, closing nearly 10 percent lower on Tuesday to $28.84, which is 24 percent off its May 18 IPO price and 36 percent down from its all-time high of $45, which it briefly touched its first day of trading before heading south.

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The decline from its $38 IPO price amounts to about a $25 billion shaving of the company’s overall value, which is about the market cap of CBS, DreamWorks Animation, Lions Gate Entertainment and Imax – combined.

Naturally, the precipitous fall – one of the quickest for an IPO in the past dozen years – has investors asking: “How low can it go?”

Around $25.65 in the next four weeks or so, some investors are betting.

The stock, in fact, already has sunk below $30, which was the smallest “target” price set by a Wall Street analyst.

Tuesday’s decline could be particularly unsettling for investors who bought shares near the IPO price, given that the drop came while most other Nasdaq stocks trended higher. Plus, investors apparently shrugged off two bullish reports on Facebook that analysts issued on Tuesday.

Tuesday also marked the first day that Facbook options were traded, and some analysts say that when stock trades down the day its options debut it’s a sign that shares are headed lower. And CNN Money noted that 56 percent of the options contracts that traded on Tuesday were “puts,” which are a way for investors to make money when a stock falls. On Tuesday, put options at $28 were selling for $2.35, which means investors on one side of that trade can only turn a profit if Facebook shares fall below $25.65 by July 28.

The reasons for Facebook’s fall are numerous, including that the IPO's underwriters have been accused of sharing negative information about the company with some would-be investors but not others. There are also questions regarding the effectiveness of Facebook advertising, especially among those who use it via their mobile devices.

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Also, the Facebook IPO of a whopping 484 million shares raised $18 billion, about 10 times what Google raised in its IPO less than eight years ago, so the demand for Facebook shares at their IPO price -- while extraordinary -- was not enough to overcome the massive availability.

Still, there are plenty of analysts who say the fall below $30 represents opportunity.

On Tuesday, Wedbush Securities analyst Michael Pachter initiated coverage of Facebook stock with an “outperform” rating and 12-month target of $44.

Pachter said Facebook can grow its revenue from $3.7 billion last year to $14.5 billion in 2015, when per-share earnings could be at $2. That would represent a price-to earnings ratio of 22 if the stock is at $44, which Pachter figures is a reasonable multiple to pay for a big-growth stock.

Also on Tuesday, James Lee of CLSA Asia-Pacific Markets initiated coverage of Facebook with a “buy” rating and $40 target, figuring the company will post net income of $4.6 billion in 2016.

“We expect the company to triple its advertising revenue to $11 billion by 2016, yet still command only 6 percent of the total global online-advertising market share,” Lee wrote Tuesday.

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