facebook zynga groupon

We have witnessed both the best and worst of IPOs in the business of social media in the past year. Facebook Inc (NASDAQ:FB) easily takes the top spot in the worst category, while LinkedIn Corporation (NYSE:LNKD) comes off as the best one. Before going into what went wrong, lets take an overview of each IPO and how the respective stocks are performing today:

Facebook Inc (NASDAQ:FB) opened with an offer of $38 per share (May 18, 2012) and witnessed the only high of $45 on the first trading day. The stock is down 60 percent from the IPO value, trading at a mere $20 these days.

Groupon Inc (NASDAQ:GRPN) stepped into public trading (Nov 4, 2011) with much pomp and show, making the record of being the largest IPO since Google Inc (NASDAQ:GOOG)’s in 2004, at that time. The daily deals company sold 35 million shares at an offer of $20, raising $700 million and bringing its market cap to $13 billion within the first day. Underwriters on the IPO were led by Morgan Stanley, Goldman Sachs, and Credit Suisse.

None have fallen as far as Groupon Inc (NASDAQ:GRPN) has, the price has tanked to a mere $5.5, 71 percent down from the IPO of $20. The company is now valued at only $3.7 billion. The Q2 earnings, that were announced yesterday missed the expectations on revenue, but fared well in profits. Groupon is plummeting in stock price, despite of favorable income, trading at $5.5 (and still tanking), down from the previous closing price of $7.5.

Zynga Inc (NASDAQ:ZNGA) stepped into open market on  Dec 16, 2011, with an initial offer of  $10 for 100 million shares, raising $1 billion and breaking Groupon’s previous record. The social gaming enterprise was unable to generate any excitement, the shares only went down from the opening price, and now trade below $3, 70 percent down from the the IPO price.

An example of a sustainable and profitable IPO by a social media company, was that of LinkedIn Corporation (NYSE:LNKD), back in May 2011. The pioneer of professional networking was also the first social media corp to make a debut in any stock market. All the rest of them, Facebook Inc (NASDAQ:FB), Zynga Inc (NASDAQ:ZNGA), and Groupon Inc (NASDAQ:GRPN) , only followed suit. The IPO was priced at $42 to $45 per share on 8 million shares. Linkedin’s first trading day on the New York Stock Exchange broke several records, the share price rose as high as 170 percent, and closed at $94, more than double of its initial price of $45, valuing the company at $9 billion within just 24 hours of trading. Today LNKD stock is trading at $104, the price has generally stayed above $100 in the past two months with significant dips seen only for one to two trading days. The market cap of Linkedin is about $11 billion. Linkedin’s high profile IPO  was audited by Deloitte & Touche LLP.

Another success story of a tech company’s IPO, is that of Yelp Inc (NYSE:YELP). Yelp, a consumer-reviews company, opened up with $15 (March 2, 2012) and now trades at a decent $22. Yelp’s accounts are also audited by Deloitte & Touche.

While some have speculated that high pricing brought down these IPOs, the more plausible reasons are lapses in auditing and the general volatility in online businesses. Zynga was offered at $10 a share, while the popular analyst opinion at that time was that it could have gone for $12. Similarly Linkedin opened with $45, the highest IPO price, and so far the only success story. So high initial offering does not seem to be the issue here. Moving on to auditing problems, Facebook, Zynga, and Groupon are all audited by Ernst & Young LLP. Just last month the SEC questioned Facebook in its public letters over the independence of its auditor, i.e. EY, after it provided non-auditing services for its client.

In the case of Groupon’s IPO, the company was having major accounting issues that were even pointed out by SEC. The online shopping enterprise was asked twice to change the way it accounted for revenues in its filings, a method that was previously approved by company’s auditor Ernst & Young. Groupon was again asked to alter the results of its post-IPO quarterly earnings, this time also due to inappropriate accounting . Sterne Agee  and Sena downgraded Groupon from Buy to Neutral, while basically accusing the company of projecting artificial profits in Q1 of 2012. EY’s issues with accounting seem to have no end. This auditing giant has had a series of clients that were accused of misdealings in their accounting books, read Francine McKenna‘s detailed analysis of EY’s many clients. It appears that EY has laid down a new set of rules to define revenues, and the companies can pick each method as it suits them. Earnings can be accounted for each social game by a separate method,  in some cases ‘unrealized’ sales from gaming and ads are added to the company’s slate. Moreover, Zynga and Groupon keep changing the ways of calculating total profits, which leads to artificial inflation of quarterly numbers. EY’s auditing practice is putting more value on business advocacy, rather than independent accounting, and that is misleading for the investors who put their money in the new business of social media.