It's Official: Social Media Stocks are the New Dot-Com Busts
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In theory, going public is a great thing. A broader, deeper source of financing is obtained. Publicly traded stock becomes a corporation's own currency to be utilized for acquisitions, dividends and compensation. A whole new set of advisors and ready information on the value of the company and the performance of its operations are now provided by the stock price and the shareholders.
In reality, going public can be a disaster. It is expensive, both going public and complying with a new set of laws and regulation. Management's attention is diverted away from running the company. A whole new world of lawsuits await. Many times the company would have been much better off prudently expanding from organically generated revenues. Other times, the money raised from going public is wasted on foolish acquisitions.
Social media stocks Zynga, Groupon, Angie's List, Pandora Media and Facebook are now rivaling the dot-com disasters of the early 2000s. Each is trading well below its initial public offering price. All would have probably been better off remaining privately held and growing based on earnings, rather than the proceeds of an IPO.
The numbers tell the story.
Zynga, of Farmville fame, went public in December at $10 a share with a valuation of $7 billion. It is now trading at about $3.15 a share, more than 68 percent off its initial public offering price with a market cap of around $2.25 billion. Year to date, it is down by 67.22%. Zynga has a negative profit margin of 43.71%. The short float for Zynga is 15.68%.
A short float of 5% is considered to be troubling for a company.
With a short float of 10.81%, Groupon obviously has its detractors, too. Those holding a short position have been rewarded as the share price has fallen from the initial public offering level of $20 to about $7.15 in less than a year. Groupon has a negative profit margin of 10%.
Year to date, Pandora Media is off by 38.01%. It has dropped from the $16 June 2011 initial public offering price to around $9.50. Pandora Media has a negative profit margin of 9.73%. There is a short float of 14.96% for Pandora Media.
Angie's List has a negative earnings per share of $1.05. Now trading around $13, it is well below the year high of 19.82. Losses continue to mount for Angie's List, an online business service referral company. The initial public offering price for Angie's List was $13 in November 2011.
Facebook met the real world of disappointed analyst expectations with its first quarterly earnings report last week. While revenue grew 32% to $1.18 billion in the second quarter, there was a net loss of 8 cents per share, with user and revenue growth slowing for the fifth consecutive quarter. That, combined with the lack of bullish forward guidance from the company, sent the share price to under $22, a new low. On May 18, Facebook had its initial public offering at a price of $38 a share.
Comparing the social media companies of today with the dot-coms of yore, Peter Schiff, Chief Executive of Euro Pacific Capital, cautioned that, "A lot of these companies are going to make a quick buck and flame out. Just look at 10 years ago.” That view was reinforced by Michael Yoshikami, founder of Destination Wealth Management, who observed that, “People just can’t figure out how these companies are going to make money and justify these huge valuations."
For investors, there will be survivors, however. From the dot-com boom, AOL (NYSE: AOL) has rebounded to be up 108.74% for 2012. For the year, earnings-per-share growth has risen 101.67% for AOL. Next year, earnings-per-share growth is expected to be 34.03%. Now trading around $34 a share, AOL has soared from its 52-week low of $10.06.
Facebook seems to be the best positioned for this type of recovery. Facebook now has 955 million users, a jump of about 50 million during the last three months. Revenue growth and earnings-per-share growth is still increasing. It is making money with a profit margin of 26.95% (AOL's is only 1.35%). Under $22 a share, Facebook is well beneath its high of $45. But, like AOL, it has the revenue growth to take the share price much higher.
Fool blogger Jonathan Yates does not own any of the stocks mentioned in this article. The Motley Fool owns shares of 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.If you have questions about this post or the Fool’s blog network, click here for information.