By Angela Moon
NEW YORK (Reuters) - Facebook shares tumbled ahead of its first quarterly results announcement as a public company on Thursday, hurt by a weak quarterly report and a grim outlook from online game developer Zynga.
Facebook Inc shares dropped 7 percent to $27.65 in premarket trading while Zynga Inc slumped 40 percent to $3.04 - the two most heavily traded stocks before the bell on Nasdaq.
"Considering that Zynga was a recent IPO, it's another black eye for Wall Street. You bring up an IPO and you get burnt again and again," said Joe Saluzzi, co-founder of Themis Trading LLC in Chatham, New Jersey.
Zynga's results are "not creating good confidence in the sector as they (social media companies are) certainly related to each other."
The fate of the two companies is intertwined, with Zynga's games, such as "FarmVille" and "CityVille," helping to make up more than a tenth of Facebook's revenue last year.
Late on Wednesday, Zynga slashed its 2012 outlook and the company's quarterly results badly missed Wall Street targets. A number of brokerages cut their price targets on the company on Thursday, including Wedbush, Citigroup and Lazard, casting some uncertainty over Facebook ahead of its inaugural results after the close of trading Thursday.
Earlier this week, the options market was forecasting a 14 percent move up or down in Facebook shares following the results. That means options investors expect the stock to rise to as much as $32 by Friday or to fall to as low as $24.
Since the IPOs, shares of Facebook and Zynga have been in a downward spiral. Facebook, at $28.45, is off nearly $10 from its market debut price of $38 in May, and Zynga is at $4.92, nearly half its debut price of $9.50 in December.
Despite the steep decline in their share prices, Facebook and Zynga are both trading well above their market valuations. Facebook is still trading at around 70 times earnings, according to Thomson Reuters data. An analysis by Thomson Reuters StarMine puts the company's intrinsic value at a modest $9.72 a share, or about one third its current value, based on estimates of the company's projected growth for the next decade.
Earlier in the week, analysts, on average, were expecting revenue in the second quarter to grow 28 percent to $1.15 billion.
With over 900 million users, Facebook is the world's largest social networking company, challenging established Web companies for consumers' online time and for advertising revenue.
(Editing by Bernadette Baum)
