Social media stocks hammered as Facebook debuts

by May 19, 2012

NEW YORK (Reuters) - Social media stocks, led by Zynga Inc, slumped in volatile trading as traders used the securities to hedge or bet against the star of the sector, Facebook Inc (FB.O), which went public in a disappointing debut on Friday.

Facebook shares rose to a high of $45 in early trade but lost steam and was at $38.15 in afternoon trade. Analysts blamed the poorer-than-expected first-day showing on the vast number of shares floated, a rich valuation and market weakness.

"This starlet tripped on the red carpet," said Max Wolff, a senior analyst at GreenCrest Capital. "They started out with a fairly aggressive price range, then jacked it up and threw a lot more shares into the hopper. You either juice the number of shares or the price, you don't usually do both."

Shares of Zynga, the leading social gaming company which gets much of its revenue from Facebook, fell about 20 percent at one point, and were halted twice. Zynga was down 15 percent at $7.03 in late afternoon trading, having earlier hit a low of $6.63, which triggered an automatic halt due to the fluctuation in its price.

Other social media stocks, including LinkedIn (LNKD.N), Groupon (GRPN.O), Pandora Media (P.N) and Yelp (YELP.N), fell more than 6 percent on Friday, with Yelp losing 12 percent.

GSV Capital (GSVC.O), a listed investment vehicle that bought Facebook shares before the IPO, slumped 18 percent to $13.20.

Some traders who cannot short Facebook shares early may be betting against other social media stocks instead, according to Wolff and others.

Zynga accounts for more than 10 percent of Facebook revenue, so traders may be focusing mostly on Zynga shares and options as an alternative to Facebook.

"Somebody obviously tried to blow that thing out of the water using it as an inorganic hedge against Facebook," Wolff said.

"There's nothing going on that was released -- no Zynga-specific news," he added. "There are no senior personnel talking, no new numbers that would explain a movement, let alone a movement of that size."

A Zynga spokesman declined to comment.

Zynga options have high "skew," which refers to the pricing difference between out-of-the-money puts and out-of-the-money calls, according to Ralph Edwards, director, derivatives strategy at ITG.

"This typically means people are looking for Facebook to kind of spill over to Zynga," Edwards said. "If Facebook catches a cold, then Zynga gets pneumonia."

Cowen and Company analyst Doug Creutz said some investors may have owned Zynga and other social media shares as a proxy for Facebook before Friday's IPO.

"Now they can own Facebook directly," he said. "You may simply be seeing people sell Zynga to buy Facebook."

(Editing by Bernadette Baum and Bernard Orr)

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