LinkedIn’s IPO earlier in the Summer seems to have sparked a major IPO push for a lot of the big web companies that have found success as of late. Groupon filed their initial docs last week, Pandora’s shares hit the market on Wednesday, and Zynga is by all accounts filing their initial documents sometime very soon.
While LinkedIn’s IPO was largely a success (so far), it still raises eyebrows: the initial IPO price of $45 represented a Price-to-Earnings ratio of about 250, and the current trade price has a P/E of 500, much higher than the average for the market, and certainly not the hallmark range of a strong company. With that said, Groupon and Pandora are likely to have even worse states, but unlike LinkedIn, the companies are getting lambasted in the media before their IPOs. Rocky Agrawal has been doing his best to ruin Groupon’s IPO through a series of guest posts on Techcrunch, which are sticking on the top page as featured posts with rather uncouth titles like “Why Groupon is Poised for Collapse“, “Groupon was ‘the single worst decision I ever made’“, and “Why I want Google Offers and the entire daily deals business to die“. You can probably guess the gist of those articles from the titles, and they are good reads despite being titled as if they were trollish posts on a business forum frequented only by 16 year olds.
In slightly more journalistic corners of the world, Fortune ran an article today on Pandora’s business model as a loser in the long run, detailing how they have yet to find a way to generate a profit from any aspect of their service, yet they are raising the price of their IPO anyway.
So really, it’s not looking good for the tech IPOs right now. Groupon’s core business looks completely copy-able, a bad sign, Pandora is going to start getting quashed by iCloud and other cloud music providers, and neither is making money. And this follows LinkedIn’s astronomical valuations, which seem hardly justifiable if you actually think about LinkedIn’s business model. Yet people ate up the LinkedIn IPO, and even with all this bad press, nothing seems likely to stop Groupon and Pandora from becoming overvalued by months end as well.
Zynga, though, has solid financials. They actually MAKE money, but that little detail could backfire in the face of investors’ rabid hunger for tech stocks: If they deputed at a P/E of 250 like LinkedIn and opened with as many shares as LinkedIn (roughly 100M), assuming a net income figure of $400 million (who really knows with a private company, but I’ve seen that number frequently), then Zynga would be the highest priced stock in the history of the stock market at around $1,000 per share. Remember, that’s at the P/E multiple that LinkedIn opened at, BEFORE their stock DOUBLED in price. That would put our irrational exuberance in a company at a new, embarrassing high, and even staunch anti-bubble supporters would have to admit that something was wrong. Something tells me we will find out before the end of summer.
danielmarkmiller.net 