Facebook shares slid below $29 to a new low on Tuesday as nervous investors fled the company's shares, concerned about the social network's long-term business prospects.
Shares of the No 1 social network fell 10 percent to an all-time low of $28.65, before closing at $28.84, or down 9.6 percent. Since its market debut at $38 on May 18, the eight-year-old company has shed approximately $25 billion in value - roughly equivalent to the market capitalization of Morgan Stanley, the lead underwriter of Facebook's IPO.
Wall Street has harboured concerns that Facebook, while boasting nearly a billion users worldwide and dominating Internet social-networking, would have difficulty translating its growing presence on smartphones and other mobile devices into revenue. Rivals Google Inc and Apple Inc currently dominate the mobile arena.
Facebook's quest to monetize mobile is spurring widespread speculation over its next moves. Technology bankers say the company would benefit from tacking on mobile operating software through an acquisition of Norway's Opera, which has been on the auction block for a while. The New York Times cited sources dredging up a longstanding rumour that Zuckerberg was pondering building a Facebook phone, and that an easy way to acquire the hardware expertise needed was to buy troubled Research in Motion.
The Blackberry maker said late on Tuesday that it hired J P Morgan and RBC Capital Markets to help the company and its board with a "strategic review."
"They are clearly looking at smartphones and are trying to become more vertically integrated with their users," said Ryan Jacob of the Jacob Internet Fund. "They just don't want to be another app on Google's or Apple's platform."
"Speculation that Facebook is dabbling outside their main expertise and possibly planning another large acquisition may be unsettling to some investors," he added. "But I think options trading is behind today's drop in the shares."
Facebook options began trading on Tuesday, presenting a tempting target as more investors bet the underlying stock would head south. They piled into put and call options - granting investors the right to sell or buy stock at a certain price - marking one of the busiest debuts ever in the options market.
"The fact that the stock has been weak on the first day of options trading means people are betting on future declines or buying insurance," Jacob said. "Investors may want to hold the stock but are buying protection in case the price falls further."
Jacob said he did not buy Facebook shares in the IPO and has not bought the stock since the debut. "If the price is right we would consider buying," he added. "It's not quite there yet."
Janet Tavakoli, president of Tavakoli Structured Finance Inc in Chicago, said she bought puts expiring in September with a strike price of $25, at a cost of $210 per contract, with each contract representing 100 shares.
"The valuation is a complete bluff. There is still a long way to go down from here," she said. "There will be insiders selling their shares on Aug. 20, when the first lockout period is over. There will be a lot of shares that will hit the market and more in coming months."
Analysts say apart from the challenge of earning money off smartphone and tablet users, Facebook - which relies on advertising for the majority of its revenue --may also find it difficult to lure and keep large advertisers.
Days before Facebook's debut, General Motors announced it was pulling out of paid advertising on the social network, citing Facebook's unproven track record and echoing potential concerns about the lack of evidence that advertising on Facebook yielded strong returns on investment.
"Facebook is in a transition in their business model," Walter Price, portfolio manager of the Wells Fargo Advantage Specialized Technology Fund, told Reuters Insider. "It was easy to get the first 5 to 10 percent of an advertising budget to try it on Facebook and do some brand advertising, but getting the next 5 to 10 percent, you've got to displace TV and that's a lot more difficult to do.
"Facebook still doesn't have the metrics to prove profitability and prove growth and awareness from their platform," he added.