(Adds Yahoo decline in the second-to-last paragraph, updates stock trading throughout.)
May 7 (Bloomberg) -- Frenzied equity trading that erased $13 billion from the biggest social media stocks yesterday pushed volume in Twitter Inc.’s options up fivefold, all but wiping out value in a series of bullish contracts.
Almost 600,000 Twitter options changed hands yesterday, compared with a 20-day average of 109,000. The shares plunged to $31.85 from $38.75 on a day insiders where freed from restrictions on selling. Calls with an exercise price of $37.50 tumbled 97 percent to 5 cents from $1.93. Losses resumed today as the stock briefly dipped below $30 and the Nasdaq 100 Index slid as much as 1.4 percent.
Social media companies from Yelp Inc. to Facebook Inc. have fallen eight of the past 10 days, sending a Nasdaq-traded exchange-traded fund tracking the industry down 12 percent since April 24. Twitter, the San Francisco-based short-message service that went public in November, saw trading volume surge to a record 135 million shares yesterday as insiders were set free to sell equity that had been locked up since initial offering.
“People have no excuse to be long at this point,” said Ben Kelly, an analyst at Louis Capital Markets LP in London. “The growth isn’t great. They’re not growing at all, in fact, so everyone’s starting to think: Is this the saturation point now? And now there’s a pile-on.”
Facebook slipped 3 percent to $56.80 at 12:49 p.m. in New York. Yelp lost 0.4 percent after plunging 13 percent yesterday, while Pandora Media Inc. fell 2.3 percent and LinkedIn Corp. decreased 1.2 percent.
Yesterday saw the biggest drop in the combined market capitalization of Twitter, LinkedIn, Facebook, Pandora, Yelp and Groupon Inc. since at least November. Share values in the group retreated to $199.6 billion, the lowest this year, from $212.9 billion the day before, according to data compiled by Bloomberg.
Those companies make up some of the biggest holdings in the Global X Social Media ETF. The ETF fell 3.2 percent to $16.29 today. It’s down 23 percent in 2014 after rising 64 percent last year.
Assets in the social media ETF increased 10-fold last year amid investor demand for shares of fast-growing companies. About $2.3 million was pulled from the security last month, the first withdrawal since June, data compiled by Bloomberg show.
“There’s a sense that maybe the music has stopped playing for some of the more speculative names,” Kevin Caron, a Florham Park, New Jersey-based market strategist at Stifel Nicolaus & Co., which manages about $160 billion, said in a phone interview. “You might look to move your money elsewhere.”
Twitter plunged 18 percent yesterday even as early investors Chris Sacca and Rizvi Traverse Management LLC pledged not to sell in a sign of confidence in the company. Chief Executive Officer Dick Costolo and co-founders Evan Williams and Jack Dorsey also said they are hanging onto their stock.
Even though Twitter shares have fallen, it still trades at more than 800 times estimated earnings for this year, making it the fourth-most expensive company in the Russell 1000 Index. Profit will rise 122 percent in 2014 and increase six-fold in 2015, according to analyst estimates compiled by Bloomberg.
Twitter shares that have been borrowed and sold on expectations of declines make up 6.7 percent of outstanding stock, the highest since its initial public offering, according to data from Markit. The stock is down 50 percent this year after the company reported slowing user growth, raising concern that it may not be able to add more members.
“Eventually the fundamentals will take over and drive the performance of the stock,” said Caron of Stifel Nicolaus. “Every company that comes out as a hot IPO eventually has to grow into a valuation that makes sense at a more mature stage.”
Social media and Internet shares are among the most expensive in the U.S. stock market. Pandora trades at 135 times estimated profit and LinkedIn has a multiple of 84. Both have slumped at least 17 percent this year.
Volume of options on social-media stocks surged last week. Almost 65,000 LinkedIn contracts changed hands, the most since October, according to data compiled by Bloomberg on daily averages. Trading of Yelp options surged to more than 52,000, an all-time high.
Traders have been turning to the options market more and more, sending volume of contracts on social media stocks higher. Facebook options trading has climbed every year since they started in 2012, with volume rising 27 percent in 2014 from last year to a daily average of almost 430,000. Pandora contracts surged 89 percent this year to an average 33,350 from less than 4,000 in 2011.
“People who are invested across the sector unceremoniously dumped stock in similar companies on the Twitter lock-up expiry,” said Ioan Smith, managing director at KCG Europe Ltd. in London, in a phone interview on May 7. “Twitter lockup traded as a theme across the sector. There is a huge chance that the activity we saw in puts is people buying protection.”
Selling in one of the biggest initial offerings of 2013 came as Alibaba Group Holding Ltd. filed what may be the largest U.S. IPO of all time. The company and shareholder Yahoo! Inc. might raise as much as $20 billion and get a market valuation of $168 billion, more than 95 percent of the Standard & Poor’s 500 Index, data and analyst estimates compiled by Bloomberg show.
Yahoo dropped 6 percent to $34.30, the second-biggest drag on the Nasdaq 100 behind Whole Foods Market Inc. While it’s too soon for managers to be considering allocations in Alibaba, at some point the market will have to make room for the Chinese e- commerce company, according to Alan Gayle, who helps oversee about $50 billion as a senior strategist at RidgeWorth Capital Management.
“My guess is that analysts are still sharpening their pencils on this, and it’s probably a little bit early for the traders to get involved,” Gayle said in a telephone interview from Atlanta. “But now that the IPO has been announced, it will be big and garner a lot of interest and dollars, and those dollars have to come from somewhere.”
--With assistance from Alexis Xydias in London.