News Analysis
NEW YORK—This year is shaping up to be the year of the technology IPOs, as a slew of Web 2.0 companies and other tech firms sold stock to investors publicly, with varying degrees of success.
Social-gaming company Zynga’s IPO went live last Friday, selling shares at $10 per share and raising $1 billion in the market. Prior to the event, some analysts touted that Zynga was one of few Internet companies to have made profits prior to going public. Others, however, lamented that the company generated more than 90 percent of its revenue from one vehicle—Facebook.
A week has now passed, and Zynga’s stock has barely budged.
After eclipsing $11 per share in the early hours last Friday, its share price fell and has stayed below $10. On Thursday, it opened at $9.65 and then sank to $9.47 per share by the end of the day.
Zynga’s shares were offered based on an implied valuation of $7 billion. Some analysts openly questioned whether that was too high, but at least it seems more reasonable than the $20 billion estimate floated by bankers over the summer, especially given the market conditions.
LinkedIn Deemed a Success
Professional networking website LinkedIn became one of the biggest IPO names of 2011, mainly due to its value as a precursor to the inevitable IPO of Facebook in 2012.
LinkedIn offered shares at $45 per share, and with a share price of $63.90 at the end of the day Thursday, is still over 40 percent higher than the initial sale—a success by any measure.
LinkedIn went public earlier in the year, when the financial markets were considerably more upbeat, which may explain its initial surge—it closed at over $94 on May 19, its first day of trading.
Since then, however, along with the markets, its price has taken wild swings, falling to nearly $60 per share on June 20 and then rising again to trade at well over $100 for most of July, only to fall precipitously back to $75 on Aug. 8, top $90 in October, and sink to $59 by Nov. 28. Some companies—such as Zynga—had delayed IPOs due to volatile market conditions.
Analysts say that LinkedIn’s business model is one of the most sustainable formulas of all the Internet companies that went public this year. It has few competitors in the professional networking space, as well as a sound business model to generate ad revenue and fees from recruiters looking for potential clients.
Jury Still Out on Groupon
Groupon and Pandora were two of the other well-known companies to go public earlier this year.
Groupon, the Chicago-based daily deal website, issued its shares last month. While its shares shot up more than 50 percent early on, it has since come back down to earth. Compared to its issuance price of $18 per share, its shares were up 20 percent, at $22.10 per share, as of Thursday’s close.
Groupon had suffered some controversy early on in the IPO filing process. In its initial IPO filing with the Securities and Exchange Commission (SEC), it had used an accounting metric called Adjusted Consolidated Segment Operating Income, which showed an operating income of $60 million for fiscal year 2010. After much scrutiny, however, it revised its filing and reported a loss of $420 million for the same period.
Pandora Struggles Post-IPO
Pandora Media, which runs the popular Internet radio website, went public on June 15, selling shares at $16 per share. The sale valued the company at more than $2.5 billion at the time of the IPO.
Pandora has since struggled, however, with shares falling more than 40 percent from its IPO price. Its shares closed at $9.83 on Thursday.
Some analysts have questioned the company’s business model, which relies primarily on advertisements (90 percent of its revenue) while content royalty/acquisition costs exceed 50 percent of its top-line revenue. As it gains more listeners, entertainment firms will likely require even higher royalties.
The company also faces stiff competition in the Internet radio space, with little recourse in customer retention. Besides rivals Slacker Radio and Rdio, European competitor Spotify this year announced a new U.S. service, with unlimited skips and unlimited listening, which Pandora currently does not offer.
Facebook Launch Ahead
Social-networking giant Facebook Inc. plans to submit an IPO filing to the SEC early next year and sell shares in the second quarter, reports indicate.
When it goes public, Facebook will become the most highly anticipated technology IPO since Google went public in August 2004. The IPO could fetch the company more than $10 billion from the market, at a valuation exceeding $100 billion, making Facebook instantly one of the most valuable Silicon Valley firms.
Facebook isn’t just trying to emulate LinkedIn. “Since last year, Facebook executives have been crafting dummy scripts for quarterly earnings calls, addressing imaginary questions from analysts about the company’s revenue and profit,” states a Wall Street Journal report, citing company executives.
While CEO Mark Zuckerberg is young, he has surrounded himself with an experienced and dynamic executive team. One of Zuckerberg’s chief confidants is 42-year-old former Google executive Sheryl Sandberg, the company’s chief operating officer.
However, Facebook isn’t without its problems. Pundits still question its business model and wonder how it can generate sustainable advertising revenue from bigger clients. Most of Facebook’s ads are currently sold to individuals or small businesses.
In addition, Facebook still faces lingering questions over user privacy issues. It recently settled with the U.S. Federal Trade Commission and agreed to conduct audits over its user privacy policies.
