The hype over Facebook's initial public offering has excited investors revisiting other social media companies, even though most of those stocks have plunged since the fanfare of their own IPOs.
Trading volume and options activity in stocks like Renren Inc, often called the Facebook of China and Quepasa Corp, a social media technology company focused on Latin audiences, have soared since the IPO news of the world's largest social network on Friday.
Neither company has the reach of Mark Zuckerberg's massively successful Facebook, but being in a similar business has been enough to bring investors looking to profit on quick trades.
Analysts warn that these other social media companies face significant headwinds and the sudden interest in related companies could hurt investors later.
It's like the bright light on a hot summer night, attracting all the bugs, said James Dailey, who manages $215 million at TEAM Financial Management LLC in Harrisburg, Pennsylvania. Dailey does not own these stocks.
Facebook Inc filed for an initial public offering Wednesday that could value the social network between $75 billion and $100 billion, putting the company on track for one of the biggest U.S. stock-market debuts of all time.
The action in social media stocks of late may be instructive more in terms of the kind of frenzy that will erupt when Facebook actually starts trading, rather than a changed belief in the fundamentals of the other companies.
Facebook will dwarf the combined capitalization of these names. Nonetheless, watching the demand for, and pricing of, out of the money calls in these names may be a proxy for the reception Facebook receives as it approaches listing, said Ralph Edwards, director of derivatives strategy at ITG Inc.
Quepasa, with a market capitalization of just $150 million, is up 20 percent since Friday to $4.40, after rising as much as 33 percent on the day of the news. Trading volume topped 354,624 shares the following Monday, a five-fold jump from its daily average of about 63,922 in the past 25 days.
Similarly, Renren shares are up about 31 percent since Friday, lately trading at $5.47. Trading volume surged to as much as 4.2 million shares earlier this week, compared to a daily average of 744,062 in the past 25 days.
Renren has lost 70 percent in stock value since its public trading debut on May 4. The company has a market capitalization of $2.2 billion.
The speculative juice is ramping up, but I think investors are getting ahead of themselves, Dailey said.
LinkedIn Corp shares have also gained 6 percent since Friday, trading at $76.81. The stock is down about 19 percent from its NYSE debut on May 19.
OPTIONS GET EXPENSIVE
In the options market, the value of calls - contracts that give the investor the right to buy shares at a fixed price any time up until expiration - in Quepasa, Renren and other more well-known names like LinkedIn have become pricey.
In Quepasa, premiums in May $5 calls, one of the most actively traded options in the name over the past few days, rose as high as $1.10 a contract earlier in the week, compared to about 20 cents leading up to the Facebook IPO news, according to Interactive Brokers Group options analyst Caitlin Duffy. They stood at around 65 cents on Wednesday.
In Renren, premiums on actively traded Feb $6 calls rose as high as $1.15 on Tuesday, after trading at just 5-10 cents prior to the news. That's a hefty profit for an investor that bought calls at the cheap price and sold later at the higher value. The premium was at 30 cents on Wednesday.
Calls in Zynga Inc, which is about four times Renren in market capitalization, were also popular. On Monday, Zynga option volume was 2.5 times the average daily levels with 8,702 calls and 7,068 puts traded, Trade Alert said.
Zynga has been rallying of late because Facebook derives 12 percent of its revenue from the company.
Both Renren and Quepasa are viewed as companies highly susceptible to a short squeeze, according to Thomson Reuters StarMine.
Although they are in a hot sector, it is hard to see how either of these stocks would benefit significantly from the Facebook IPO. Also, the fundamentals of these individual companies provide significant headwinds, said TD Ameritrade chief derivatives strategist J.J. Kinahan.
As of Wednesday's close, options volume on Renren was 2.7 times the average daily level with about 20,000 calls and 9,249 puts traded, data from options analytics Trade Alert showed.
In Quepasa, 837 calls and 201 puts changed hands on Wednesday. Quepasa is typically a thinly traded options name, averaging 471 calls and 82 puts per day, figures from Trade Alert showed.
This (Quepasa) is not a stock that I look at everyday. I've never seen the volume surge like this before, and this will probably be the only time, Duffy said.
(Reporting By Angela Moon; Editing by Andrew Hay)