Facebook, Zynga and Groupon IPOs Meet their Comeuppance

Updated on

Facebook, Zynga and Groupon IPOs Meet their Comeuppance

At the time of writing, investors in Facebook Inc (NASDAQ:FB)’s IPO, priced at $38, have received a percentage haircut of about the same amount on their investment. Though shares have been falling right from day one, yesterday’s announcement of Facebook’s first quarterly result as a public company, a not-so-memorable one at that, precipitated an another 11 percent fall today. In many ways the days leading up to Facebook’s IPO were reminiscent of the ill-fated tech boom-and-bust. Those days too, slender and nebulous technological reasons were sought out to justify the bloated valuations of companies, be they new ones, or already listed. It is interesting to note that some analysts have determined $9.72 per share as an intrinsic valuation of Facebook. Going by current trends, the day may not be very far away when the stock actually does plummet that depth. One can argue brand valuation, user base, market leadership, or whatever till the cows come home – the fact remains that the stock is in a relentless bear grip. And a refusal to offer guidance does nothing to help investor sentiment. We warned about all these IPOs:

Zynga: We noted that CEO Pincus was wasting money, and that someone who knows him described him as one of the most despicable people in Silicon Valley.’

On the day of Groupon’s IPO we ran an article titled, Groupon IPO= $20 Billion worth of Snakeoil (the title speaks for itself check it out).

Facebook, we warned our readers about numerous times, including a piece on May 7th, 10 days before the IPO. We noted the absurd valuation, and models which gave the stock a buy based on 22x 2015 estimated earnings. The model assumed that 43% of the world would be using Facebook.

Given that Facebook Inc (NASDAQ:FB) is a poster child for the current run of technological IPOs, how are the rest doing?

Not exactly covering themselves in glory, to put it mildly.

Zynga Inc (NASDAQ:ZNGA), the much vaunted, online “Farmville” game company, also distressed investors with a dismal quarterly result that missed estimates, and a gloomy outlook. Zynga’s price lost 42 percent after the results, and is now down over 68 percent from its issue price of $10.

Groupon Inc (NASDAQ:GRPN), the daily deals site has belied all the expectations about it being the new face of local commerce, and its share price has eroded from the $20 issue price to about $7 now.

Pandora Media issued at $16 in June last year, and is currently quoted at $9.94.

So have investors been suckered into these fad stocks, and are now taking a bath after the promoters, bankers, and PE players cashed out?

Looks so – because the details on Yahoo, of insider selling in Zynga, through the vehicle of a secondary stock offering in April, reveal that they cashed out in the same quarter in which Zynga Inc (NASDAQ:ZNGA) imploded. “The VCs, the private equity guys at the early stages, already cashed out and made their fortunes,” Reuters quotes Peter Schiff, chief executive of Euro Pacific Capital as saying. “Everybody else who ran to buy the stock at the IPO at a sky-high valuation ended up holding the bag.”

This dismal performance from such a high profile line-up of tech issues, has completely spoiled the outlook for other Silicon Valley start-ups looking to raise capital. In the end result, investors will end up become overly wary of companies that do not have cast-iron business plans, relying instead on fad-like, virtual, and unpredictable business metrics that are valid until the IPO closes.

Here it may not be out of place to mention Warren Buffett, and his well-known allergy to technology companies. The Oracle from Omaha, once joked that he wanted to have a class answer a question on the value of a theoretical technology company, and that he would fail anyone who turned in a response. He is also reputed to have said that “technology is not something we understand, so we don’t invest in it.” Yet he invested in companies like IBM and Intel, simply because they were stable and mature businesses, whose futures could not be determined by a whimsical technological development that rendered their whole business unviable.

And therein lies the difference.


Leave a Comment

Signup to ValueWalk!

Get the latest posts on what's happening in the hedge fund and investing world sent straight to your inbox! 
This is information you won't get anywhere else!