Facebook Shares On the Mend
06/20/2012| 12:16pm US/Eastern
--Facebook stock has rebounded more than 20% from June 5 closing low
--Trader says institutional investors' instinct to sell shares has waned as shares stabilized
--Some analysts turn positive on the stock
NEW YORK--Facebook Inc. (FB) shares slipped Wednesday, breaking a four-session "win" streak. But the decrease did little to dent the more-than-20% climb for the stock over the past two weeks, a stark turnaround from its early troubles.
The social-network company's stock fell 31 cents, or 1%, to $31.60 Wednesday. But it has rebounded smartly from its June 5 closing low, recovering about half the tumble it had suffered in the weeks following its debut. A confluence of factors have been cited as fueling share gains.
Traders and other market participants have speculated that some of the rise is attributable to investors moving past an initial aversion to the shares.
"It just seems like the selling pressure has gone away," said Sean Kelly, managing director at market-making firm Knight Capital Group Inc. He said traditional buy-and-hold investors, or "long-only" holders, have been warming to the shares. "We'd had "long-only" players who had been selling the name ever since it got down into the low $30s, and selling it relatively aggressively. We just haven't had those calls in the last several days."
The amount of media coverage critical of the company's initial public offering on the Nasdaq Stock Market has receded, potentially reducing investors' jitters about the stock, said Mr. Kelly, who heads stock-trading on behalf of Knight's institutional clients, such as mutual funds and investment advisers.
As negative news coverage has ebbed, Facebook has continued efforts to move its business forward, saying this week it agreed to buy facial-recognition startup Face.com. Facebook also is disclosing moves to strengthen its nonadvertising business. It will start allowing users to make payments to developers of games and "apps" on the site in local currencies, replacing a system pegged to the U.S. dollar. The company also plans to let application developers charge users for their services on a subscription basis. Facebook takes a 30% cut of payments made to third-party developers.
"We're starting to see some sense of how the company is going to monetize," said Fuad Ahmed, whose company Success Trade Securities Inc. owns discount brokerage Just2Trade. "That's the most important thing...how are you going to make money? Our customers are starting to hold the stock overnight. They're starting to feel comfortable."
In addition, the early, steep fall in Facebook stock was cited as potentially positioning shares for a rebound.
"Part of it could be a natural bounce. You don't often see a stock come from its high of $45 to a low of $25 in a couple of weeks," said Joe Kinahan, TD Ameritrade chief derivatives strategist. The stock briefly surged to $45 in its first day of trading but quickly surrendered those gains.
Technical analysis also supports the stock's rise. One sign that selling pressure isn't just fading but is being overtaken by an increase in buying pressure is that the stock has stretched its streak of higher intraday lows to 10 sessions. The stock also reached higher highs in eight of the past 10 sessions.
Based on the century-old Dow Theory of market analysis, this suggests the stock has entered the "accumulation phase," or the first stage of a longer-term trend upward, as some investors have determined that all the bearish news has been priced into the stock.
In a separate bullish sign, some stock analysts have recently predicted success for the company. Susquehanna analysts reiterated their "positive" rating on the shares Tuesday, saying they expect the stock to rise to $48.
Evercore Partners analyst Ken Sena said in a note to clients Wednesday that Facebook is likely to start drawing revenue from its mobile site, among other efforts it is making to increase its marketing business. Evercore rated the shares "equal weight," saying that better buying opportunities might emerge in the next six months with the expiration of lockup periods restricting insider sales of shares.
"While Facebook may have a rocky near-term journey, the long term is worth remaining committed," Mr. Sena wrote in the note.
Many more Wall Street analysts will likely start offering input on the stock next week, which marks the end of the Securities and Exchange Commission-mandated "quiet period," the 40 calendar days following the deal when analysts from the 33 firms that served as managers and co-managers of Facebook's IPO are prohibited from publishing stock recommendations on the company.
Despite the recent stock rise, activity in the options market shows some skepticism that Facebook's gains will last. A week ago, total bullish bets outstanding in Facebook options slightly outpaced bearish ones at a rate of 1.05-to-1, according to options-data firm Trade Alert. Since then, new bearish positions have flipped that ratio; bearish bets outpace bullish ones 1.33-to-1. Over that time, the most actively purchased option contract was a bet Facebook shares would finish the year below $20.
Some of Facebook's recent gains have come alongside a recovery in social-media stocks that have been beaten down. Zynga Inc. (ZNGA), maker of videogames such as "CityVille" and "Words With Friends," has risen 5.9% this week, paring a more-than-15% decline over the past month. Online-coupon service Groupon Inc. (GRPN) has risen 6.1% this week, also trimming losses over the past month.
Like many technology companies, Facebook trades at a hefty premium to its earnings and revenue, suggesting investors have high expectations for the company's financial future.
Facebook's share price was 60 times higher than its estimated current-year earnings as of Wednesday morning, giving the stock a loftier valuation than all but nine of the companies in the S&P 500, according to FactSet.
A Facebook representative declined to comment on the stock's recent rise.
--Tomi Kilgore, Kaitlyn Kiernan and Anupreeta Das contributed to this article.
Write to Matt Jarzemsky at email@example.com.