Any discussion of investing in IPOs generally begins with a record of Warren Buffett's oft-chanted warning to Berkshire Hathaway (BRK.B) shareholders (and others) never to invest in initial public offerings because it is very difficult to sort out the hype from the reality. However, it is undeniably true that IPOs bring a wave of excitement for investors resulting mainly from an "early bird" syndrome that may not always produce a succulent worm. Some of those worms stink.
Be that as it may, many investors consider IPOs to be the holy grail of investment and a sure shot way to gain untold riches. In the history of stock markets, there have been superstar IPOs such as Microsoft (MSFT) and Google (GOOG). But for every Microsoft, there is a Pets.com, which made investors wary of IPOs and primary markets. This year was no exception. 2012 saw IPOs like Facebook (FB), which were launched with much fanfare but proved to be duds. However, despite its much maligned performance, Facebook is not the worst performing IPO of the year. The distinction goes to Envivio Inc. (ENVI) with Zynga (ZNGA) closely vying for the top spot. So, here is our list of worst performing IPOs of the year and a look at things that went wrong with these stocks:
Envivio Inc.: The stock closed its latest trading session at $1.63, down about 81 percent from its initial price of $9. The first sign of trouble was when the company priced its IPO at $9, lower than the anticipated band of $10 to $12. It again bombed on the very first day of trading when it closed at $8.49. The company is involved in IP video processing and distribution business and recently reported its quarterly results, which again failed to meet street expectations. However, any investor who has done their homework would have shied away from this IPO. The company was started in 2000 and has a history of losses behind it. It planned its IPO in 2011 as well, but the issue was shelved citing 'unfavorable market conditions'. Envivio operates in a very competitive segment, however, thanks to its IPO, it is now embroiled in legal problems as well. The company has been hit by a number of class action lawsuits for allegedly misrepresenting facts for its IPO. Given the current situation, it is better for investors to cut their losses and dump the stock.
Zynga Inc.: The IPO technically belongs to 2011, as the stock began its trading in late December last year. However, it suffered its massive value decline in 2012. Though not as high profile as Facebook, the IPO had set a storm of frenzy in its own right. And Zynga set the disappointing pattern, which later was almost replicated by Facebook. The stock closed its first session at $9.50, below its IPO price of $10. Things did not get any better and the stock is now trading a little above $2, down 76 percent from its IPO price. The foremost reason behind the damp performance was the fact that the stock was overpriced for its IPO. Its fortunes are more or less tied with the fate of Facebook, making it a risky venture. The company also does not have a solid business model as it derives most of its revenue from sale of in-game goods. Recently, the company suffered another blow, as Facebook modified its deal to allow for the in-house production of games for the social networking site. The new deal threatens the viability of Zynga's main revenue stream. However, on the flip side, the company is being managed by the stalwarts of cyber worlds such as Mark Pincus. So, you might want to stick with the stock to recoup some of your losses. However, do not expect any Google like performance here.
CafePress Inc. (PRSS): Another internet company debut that failed to meet our expectations. This e-commerce platform hosting company floated its IPO in March this year. Unlike the above IPOs, this one at least performed reasonably well on its first day. However, later it was all downhill for the stock and it is currently trading approximately 70 percent lower than its IPO price. The issue shared the common characteristic of most of the disappointing IPOs - it was fully priced at its issue price. However, full pricing does not quite explain 70 percent decline in value in less than a year. The company had reported increase in net income and revenue for its FY2011, but in 2012, it had to cut back its forecasts, which accelerated the downfall of the stock value. In November, the company reported net loss of $2.4 million for its fiscal third quarter of the year and the outlook does not seem to get any better. CafePress expects its Q4 earnings to be in the range of 16 cents and 32 cents, lower than consensus estimate of 36 cents per share.
While stock investment is always a risky business, IPOs are more so because of a wide range of reasons including information asymmetry and lack of performance data. All the above three companies belong to internet technology sector, which is arguably the hottest investment sector in the current market. These IPOs show that general perception and hype should not replace analysis and common sense when it comes to investing in the market. So, be its IPO or secondary trading, always carry out due diligence to avoid losses, unless you want to get a call from Buffett going "I told you so."