Facebook Options Turning Bearish on 2015 After 195% Rally

Updated on

Facebook Inc., up 195 percent in two years and trading at a record last month, is starting to draw skeptics in the options market.

Shares of the world’s largest social network surged 43 percent in 2014, climbing to an all-time high on Dec. 22, after doubling in 2013. The gain last year was the eighth biggest among technology stocks in the Standard & Poor’s 500 Index.

Options betting on a decline in Facebook cost the most versus bullish contracts since July 2013, according to data compiled by Bloomberg. While the Internet company is a “powerful platform” for advertisers to reach more than 1 billion people, it faces the challenge of demonstrating continued growth, Eurof Uppington of Lombard Odier Investment Managers says.

“We’re not banking on seeing Facebook repeat the same great performance it had in 2014,” said Uppington, a technology portfolio manager at Lombard Odier in Geneva. His company oversees $50 billion. “It’s also seeing an increase in operating expenses. The company needs to invest in growth to overcome the law of large numbers.”

Operating expenses rose in the third quarter at the fastest pace since the first three months of 2013, data compiled by Bloomberg show. The Menlo Park, California-based company has purchased applications such as Instagram and WhatsApp Inc. to increase its appeal to younger users and drive mobile advertising sales.

2015 Growth

Now analysts predict profit and revenue growth in 2015 won’t keep pace with the increases from last year. Facebook earnings will gain 12 percent this year after nearly doubling in 2014, according to analyst estimates compiled by Bloomberg. Sales will climb 37 percent after rising 57 percent last year, the projections show.

A report last month by Frank N. Magid Associates Inc. found that Facebook’s share of the 13- to 17-year-old social-media users in the U.S. slipped to 88 percent last year from 94 percent in 2013 and 95 percent in 2012. In the same period, Twitter Inc. and messaging applications rose in popularity among that age group, the study showed.

Initiatives such as video advertising have been promising, and Facebook’s scale and product development can help the company maintain its edge with users, according to Ken Sena, an analyst at Evercore ISI. He rates Facebook a buy and predicts shares will climb to $95 each from $78.45 at the end of last week. They rose 0.7 percent to $78.98 at 10:12 a.m. in New York today.

Attractive Story

“When you look at the potential for future revenue growth, then you still have an attractive story,” New York-based Sena said. “It is more expensive. But some of that premium comes from the scale advantage that they have, the data advantage that they have.”

While Facebook is among the top 10 percent of S&P 500 stocks most loved by analysts, it is also among the most expensive companies, according to data compiled by Bloomberg. The shares trade at 42.5 times estimated earnings, compared with 16.2 times for technology stocks in the S&P 500. The multiple for the Nasdaq Internet Index is 26.5 times.

Options with an exercise price 10 percent below the shares cost 3.1 points more than calls and climbed to 3.3 points above on Dec. 23, according to three-month implied-volatility data compiled by Bloomberg. That compares with the one-year average of 1.3 points.

Vanessa Chan, a spokeswoman for Facebook, declined to comment on the options trading.

Laura Martin of Needham & Co. says the options activity may be a reaction to investors buying Facebook as window dressing, the tendency of fund managers to purchase some of the best-performing stocks at the end of a period.

“Some institutions buy Facebook to hold on their books for year-end,” said Martin, a New York-based analyst at Needham. “It’s a high-quality name. It’s had a great run-up. Then you can sell it in January without moving the share price because of the stock’s liquidity and use the funds to buy something else.”