How's the ‘Smart Money’ Trading These Post-IPO Stocks?
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Facebook (NASDAQ: FB)’s IPO was nothing short of a disaster, with the stock down over 35% since going public in May. Amid the aftermath of Facebook’s debacle we decided to take a look at how other high-profile IPOs have trended and how the hedge funds we track are investing in them.
Facebook has been the highest-profile IPO over the last twelve months. The social network has showed signs of strengthening recently, but issues related to mobile monetization continue to pressure the company. This problem is only exacerbated by the fact that more and more users are now accessing Facebook via mobile.
The growth opportunity is still there for Facebook, with the social network expected to expand five-year EPS at 25% annually. Our concern for Facebook, though, is valuation-based, as its shares are trading at over 100x trailing and 40x forward earnings. We question whether Facebook can meet its growth targets that give it such a premium P/E.
As far as fund interest goes, Tiger Global was the largest 3Q fund shareholder for Facebook after a 500% share increase; Tiger Global now owns over 11.7 million shares. JAT Capital also made a notable increase of 300% in its 2Q shares owned, and is now the second most bullish hedge fund. Facebook is also one of the top tech stocks hedge funds are crazy about (see our top 10 list here).
Since its March 2012 IPO, the organic food company Annies (NYSE: BNNY) is down around 5%. Trading at 50x earnings, the case can be made that Annie’s also looks expensive, but it's worth delving a bit deeper. The food company’s forward P/E is around 33x and its five-year EPS CAGR is 23%, so we actually like the valuation here slightly better than Facebook. Annie’s recent earnings release showed strong growth despite a weak economy, and it is important that the food company continues to focus on higher-income consumers.
Steven Cohen, via SAC Capital and Sigma Capital, is the top fund owner by shares of those we track with over 900,000 shares. See Cohen's top stock picks here. Buckingham Capital is also a large fund owner with a new position in 3Q that totaled 359,000 shares.
Groupon (NASDAQ: GRPN) is down almost 85% since its November 2011 IPO. The daily deals company saw 3Q earnings below expectations, but did manage to squeeze out a couple of modest positives, including a stabilizing of third-party take rates. Despite this, management guided 4Q estimates lower, forcing analysts to revise EPS forecasts downward by 60%. With all of its weaknesses, it is easy to overlook Groupon, which is what many investors have done. It bears mentioning that this niche business is expected to grow earnings faster than Facebook over the next five years at 27% annually, and only trades at a 13x forward P/E.
JAT Capital was not just a big investor in Facebook, but it also increased its Groupon 2Q stake by over 1000%. The other two big name investors with large share purchases were Bill Miller and George Soros. Tiger Global also recently took a massive stake in Groupon (see Tiger Global's top 30 stock picks).
Since their late 2011 IPO, the social gaming company Zynga (NASDAQ: ZNGA) is down over 75%. Zynga remains heavily reliant on Facebook for its revenue, as over 80% of its top line is generated by e-games on the Facebook site. Zynga is looking to diversify with recent restructuring announcements. Part of this entails the roll out of gambling sites in the U.K., which is estimated to be a $1.5 billion market. Other headwinds are still afflux for the company though, including its ability to keep users engaged across multiple games, versus having to constantly release new versions to keep users engaged. We remain cautious on the company given its 100x forward P/E and continued reliance on Facebook.
Zynga has seen Luxor Capital and Highside Capital take notable new positions in the gaming company during 3Q, and billionaire Ken Griffin increased his firm's stake by almost 400% over this period.
Yelp (NYSE: YELP) is down over 20% since its March 2012 IPO. Choosing to remain a standalone company despite Google’s acquisition attempt several years ago, Yelp has become a leader in the e-review industry. Despite its niche model and online presence Yelp still appears to have headwinds when it comes to winning investors over. The company's forward P/E comes in at over 600x, and its five-year earnings growth rate of 18% is the lowest of our five post-IPO stocks discussed here.
All three top fund owners of Yelp took new positions in the social review company. Andor Capital was the top fund owner with 500,000 shares. The fund interest in Yelp was light, but the social site did see a variety of funds taking new positions during 3Q.
To recap: aggregate fund interest in Facebook has been the most robust of our five high-profile IPOs listed, but Groupon has received interesting attention of late. Both of these companies are expected to grow nicely into the future, but Facebook has its headwinds, while Groupon could be a good buy here. The better performing IPO, Annie’s, saw some of the weaker fund interest, except for Steven Cohen, but we believe this stock may likely continue to outpace its IPO peers given its ability to perform regardless of what economic backdrop it operates in.
Zynga has the opportunity to grow without Facebook should its U.K. gambling plans come to fruition, but we would rather wait until reality sets in before investing. The same goes for Yelp; we would remain on the sidelines for the time being, but also believe the social review site could be a nice strategic acquisition for a top search engine company.
This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Facebook and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!