Investors can’t wait for today’s hot social media companies to “go public” i.e., offer stock in their companies for sale on major exchanges for the first time. These types of initial public offerings, or IPOs, are wildly popular now because they often skyrocket in value right out of the gate, putting a lot of money in shareholders’ pockets very quickly.
One of the latest examples of this involves the nation’s third most popular real estate website, Zillow, which helps connect homebuyers and sellers with real estate professionals, among other things. Shares of the company rose about 79% the day of its IPO on July 20. The newly issued stock of LinkedIn soared more than 170% when that celebrated professional networking site went public on May 19.
There are plenty more social media IPOs in the works, so you haven’t missed your chance to get in on the action if these sorts of exciting, but potentially very risky ground-floor investment opportunities, are your bag. Here are several other high-profile social media companies expected to go public in the near future, including the one just about everyone wants to know about: Facebook.
Daily deal website Groupon, which has more than 83 million subscribers, stated that it aims to raise $750 million in the IPO it’s planning for this fall. The amount raised may end up being more like $1 billion, though, because so many investors want to buy stock in the company. Their eagerness stems mainly from Groupon’s astounding revenues, which experts think could hit $2.6 billion for all of 2011 – over an 85-fold increase since 2009, the company’s first year of business. Because of these results, Groupon has been called “the fastest-growing company in history.”
However, Groupon has received a lot of criticism for not being profitable. In fact, it hasn’t turned a profit yet in its brief three-year history and even posted a $456 million loss last year. Groupon isn’t making any money because management is funneling all available cash toward continued business growth – a strategy that isn’t expected to change anytime soon.
Social network game developer Zynga, which boasts about 60 million active daily users, could raise up to $1 billion in its IPO this fall, too, just like Groupon. However, the difference is Zynga’s already profitable. Last year, the company reported earnings of $90 million on nearly $600 million in sales. Zynga also appears to be financially sound in general. For instance, it holds nearly $1 billion in cash and other very liquid assets that can be easily exchanged for cash.
It’s important to point out, however, that almost two-thirds of Zynga’s roughly 1,900 employees have been with the company for less than a year; 90% have been there less than two years. An even bigger issue may be the company’s heavy reliance on the social networking website Facebook for sales. Since Zynga’s games are free, it makes money on virtual-goods purchases within its games through a payment system called Facebook Credits. So far, Zynga has struggled to make money outside of Facebook, though it has been pursuing deals with Apple and Google to generate sales from smartphone users. (For related reading, see Top Social Media Entrepreneurs.)
There’s still plenty of time to scrape together some cash for this long-anticipated IPO, which isn’t expected until sometime in the first quarter of 2012. And it may well end up being the mother of all IPOs, quickly raising $100 billion or more, by some estimates. That would almost immediately put Facebook right up there with companies like Intel in terms of value, though it would still have quite a ways to go to reach the scale of outfits like IBM and Microsoft, which are both worth in excess of $200 billion.
In terms of profits, Facebook’s on track to earn around $2 billion this year in EBITDA – less than a fifth of the more than $12 billion that both GE and Intel each earned in 2010. Profits at IBM and Microsoft were about $15 billion and $21.8 billion, respectively, last year. Thus, the big question for investors is: “Do you think Facebook is worth 50 times profits?” Because that’s what it’ll cost, assuming the IPO does generate $100 billion. To help put this into perspective, Microsoft shares are only selling for about 11 times profits.
The Bottom Line
The intention here isn’t to rain on the social media IPO parade, simply to acknowledge the risks. Because companies like Groupon, Zynga and Facebook are so popular, some investors may automatically assume they’re good investments and dive right in without doing much or any research. A better approach: Set aside the hype and evaluate these companies just like you would any other investment – with a level head and a healthy dose of skepticism.