Facebook Suffers Worst-Ever Drop in Market Value



FB -18.96%

suffered the biggest-ever one-day loss in market value for a U.S.-listed company, marking a Wall Street U-turn on a company that has been a pillar of a yearslong tech-stock surge.

Facebook shares fell 19% to $176.26, erasing about $119.1 billion in market value, after the Menlo Park, Calif., company warned late Wednesday about slowing growth. Facebook’s loss in market value Thursday is larger than 457 of the 500 companies in the S&P 500 and bigger than the aggregate valuation of the bottom 20 companies in the S&P 500.

Technology stocks have ripped higher, outpacing the broader market this year, as investors have wagered that companies like Amazon.com Inc.,


Netflix Inc. and Facebook Inc. will dominate industries ranging from retail to entertainment for years to come.

The stock drop represented Facebook’s biggest percentage drop ever, and the shares were the worst performer in the Nasdaq 100 and second-worst in the S&P 500.

Yet even with the technology stocks sliding Thursday, many of the market’s behemoths hung onto sizable 2018 gains. Netflix is up 89%, Amazon 55% and


28%. The S&P 500 is up 6.1% in 2018, and Facebook is down 0.1%.

On Wednesday, Facebook reported slower-than-expected revenue growth for the second quarter—albeit logging in at more than 40%—and said it expected quarterly revenue growth to decline over the rest of the year. Until then, Facebook had shown few business effects from the negative headlines that have dogged it in recent months.

The broader market was largely unaffected by Facebook’s news, with the Dow industrials rising 112.97 points, and Amazon.com’s strong quarterly earnings after the bell Thursday easing concerns about a broader pullback in the tech sector.

In general, analysts remain overwhelmingly bullish on the big tech stocks. Of those who have issued a rating for the stock, 96% of analysts have recommended buying or being overweight Amazon, while 91% have issued equivalent ratings for Alphabet, according to FactSet.

To many, analysts’ conviction in technology stocks reflects the sector’s rapid climb to dominance across many industries, as well as its record of above-average earnings growth. Yet Facebook’s slide, along with others, have made some investors increasingly worried that the technology sector could be due for a reversal.

Investors have ranked being long in big tech names and their Chinese equivalents—


Alibaba Group Holding


Tencent Holdings

—as the most crowded trade in the markets for six consecutive months, according to Bank of America Merrill Lynch’s July survey of global fund managers.

When market bets look overwhelmingly one-sided, analysts worry they are prone to unraveling quickly. Such was the case when the big tech names tumbled in March, dragging the broader stock market lower, as investors worried that fallout over Facebook’s handling of user data around the 2016 election could spur tighter regulations around the industry. More recently, Netflix slid 6.5%, notching its biggest one-day loss of the year, after missing its own forecasts by more than a million subscribers.

“What we’d been seeing would almost suggest that these companies are infallible,” said Brendan Erne, director of portfolio implementation at Personal Capital, who had been advising clients against stacking up bets in popular technology stocks. “But these trades can end abruptly and with very little reason.”

Institutional investors have hung onto large stakes in Facebook, with filing data for the quarter through March 31 showing Vanguard Group owning roughly 7.1% of shares outstanding, Fidelity Management & Research Co. having a 4.9% stake and BlackRock Fund Advisors with 4.4%, according to FactSet.

Fund managers have increasingly pulled back on bets against technology stocks. Short interest on the biggest tech stocks as a percentage of float—how many shares available to trade—has fallen to near record low levels over the past year, Bank of America Merrill Lynch said in a July report.

The plunge in Facebook shares caught options traders off guard. Investors were girding for a 5.6% move in the stock, in either direction, through Friday, Trade Alert data show, much smaller than the decline suffered so far. That is based on a trade called a straddle, which entails buying puts and calls—options to buy or sell a security—at the same price, called a strike.

There was also a surge in bullish call option activity on Wednesday ahead of the earnings release, including a mammoth trade targeting a 19% advance in the shares by December, according to Fred Ruffy, an analyst at Trade Alert.

“That thing just turned into a disaster after the move today,” Mr. Ruffy said. “They’re deep underwater on it.”

Facebook options volume ramped up Thursday, and traders forecast more turbulence for the stock, Trade Alert data show. Expected swings in the stock are near a year high.

Write to Akane Otani at akane.otani@wsj.com and Deepa Seetharaman at Deepa.Seetharaman@wsj.com

2018-07-26 21:42:00

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