Bears Tightening Grip on Facebook After Buyout Binge: Options

Facebook (FB) Inc.’s generosity is getting harder to stomach for options traders after this month’s selloff in technology stocks.

Even after shares of the world’s biggest social network slumped 12 percent last month, bearish puts are trading at the highest prices compared with bullish calls since July, a sign investors are protecting against more losses, according to data compiled by Bloomberg. The company has spent $21 billion since February to acquire virtual reality and messaging technology, both times using shares that are more expensive than 98 percent of those in the Standard & Poor’s 500 Index.

“That they’re using significantly appreciated stock as currency suggests that perhaps even they think their stock is not attractively or compellingly valued,” Scott Kessler, an equity analyst at S&P Capital IQ, said in a phone interview yesterday. “People are trying to protect themselves.”

Tucker Bounds, a spokesman for Facebook in Menlo Park, California, declined to comment on options activity surrounding the company, its use of stock to fund acquisitions or the company’s current valuation.

Facebook, which reports earnings tomorrow after the market close, has lost almost $25 billion from its market value since reaching a record on March 10, falling along with half a dozen other Nasdaq 100 members that doubled in 2013. The shares trade at 49 times estimated earnings, three times the ratio of the S&P 500, data compiled by Bloomberg show.

Analysts estimate the company will post quarterly profit of 24 cents a share. While that’s double the year-earlier result, it’s lower than per-share earnings of 31 cents and 25 cents in the previous two periods, according to data compiled by Bloomberg.

‘Big Resetting’

Concern that earnings growth is slowing, valuations are stretched and that speculators got too bullish has erased $210.5 million from the value of U.S. equities so far in April. Investors have pulled money out of Internet and biotechnology stocks that led the S&P 500 to its best yearly performance since 1997 and bought companies with stable dividends and earnings. As companies including Facebook and Netflix Inc. dropped, General Electric Co., which pays shareholders 3.3 percent, is up 2.7 percent.

“You’ve seen a big resetting of valuations in a lot of the higher-beta technology and biotech stocks that were the leaders in 2013,” Eric Marshall, head of research at Hodges Capital Management Inc. in Dallas, said yesterday in a phone interview. “We’ve had a recalibration in the way the market is valuing those. Overall sentiment has shifted more into a cautious stance.”

Netflix Earnings

Netflix, which trades at 70 times projected earnings, rallied more than 6 percent in extended trading yesterday after the largest online video-subscription service reported first-quarter sales, profit and subscriber growth that beat analysts’ forecasts.

The cost of Facebook puts protecting against a 10 percent drop in the shares is 1.72 points higher than calls betting on a 10 percent jump, according to three-month implied volatility data compiled by Bloomberg. The price difference reached 2.20 on April 14, the highest since July 24.

Those options contracts may help protect against sharp moves in Facebook shares that have made it the fifth-most volatile stock in the S&P 500 over the past 30 days, according to data compiled by Bloomberg. The company’s historical volatility, which measures the magnitude of price swings, is 49 over the period, more than double the average of 22 in the S&P 500. Netflix ranks as No. 16, with a volatility level of 41.

One-Day Move

The options market is implying a one-day move of 11 percent following the earnings report, data compiled by Bloomberg show. The stock climbed an average 13 percent after the last four releases. That includes a 30 percent surge, a record one-day gain, on July 25 after growing demand for mobile advertising helped profit and revenue top analysts’ estimates.

“Facebook is remarkably volatile for a company of its size, scale and near-certain trajectory,” Brian Wieser, an analyst at Pivotal Research Group LLC in New York, said yesterday in a phone interview. “It clearly falls under this class of stocks that’s momentum-driven.”

In February, Facebook ramped up its mobile business by agreeing to purchase WhatsApp Inc. for as much as $19 billion, including $12 billion in stock and $3 billion in restricted shares. The deal was followed by the purchase of Oculus VR Inc., a push into wearable hardware, for $2 billion in March, about $1.6 billion of which was agreed upon in stock.

Positive Fundamentals

For Benno Galliker, a trader at Luzerner Kantonalbank AG in Lucerne, Switzerland, the acquisitions are a positive sign.

“If they can afford such expensive takeovers with WhatsApp and Oculus, then they’re doing well,” Galliker said in an April 17 interview. “I don’t dare do anything right now, but I wouldn’t necessarily be all too bearish since there are a lot of positives that fundamentally support the stock.”

The Chicago Board Options Exchange Volatility Index, a gauge for U.S. stock volatility known as the VIX (VIX), slipped 0.8 percent to 13.25 yesterday. The measure slid 22 percent last week, the most since January 2013. Europe’s VStoxx Index slid 1 percent to 16.82 at 11:41 a.m. in London today.

Options volume on Facebook shares totaled 313,239 yesterday, falling 38 percent short of the measure’s 20-day average of 501,747. Some investors will be best off remaining on the sidelines until after Facebook reports earnings, according to Serge Berger of Blue Oak Advisors LLC.

“It’s actually difficult to be extremely bullish or bearish,” Berger, a Zurich-based trader at Blue Oak Advisors, said in an April 17 phone interview. “The stretched valuation and the technology selloff of course aren’t helping sentiment in this environment. Facebook could easily drop another 20 percent, and that has some investors nervous and wanting to protect themselves.”

To contact the reporters on this story: Joseph Ciolli in New York at jciolli@bloomberg.net; Corinne Gretler in Zurich at cgretler1@bloomberg.net

To contact the editors responsible for this story: Cecile Vannucci at cvannucci1@bloomberg.net Jeff Sutherland, Jeremy Herron

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