Despite all the hype behind the US-based companies that IPO-ed this year, more than half of them are trading below their offer price. This can be partly explained by the overall decline of the stock market, which has been dropping for the past two months.
On their debut, Pandora (P) popped out at 8.9%, Epocrates (EPOC) gained 37%, LinkedIn (LNKD) rose 109% and Zillow (Z) jumped 79%. While their latest decline can be attributed to macro-economic worry such as Greece’s sovereign debt crisis and the U.S. economy, does this drop mark a buying opportunity for these companies? (source)
Pandora stock has slid 10% in the last two days as competition has intensified with the launch of the iHeartRadio app and website, which also lets users create customized stations. Clear Channel’s iHeartRadio app will allow users to create personalized station categories 10 times the size of what Pandora offers with 5 times more artists and no caps on play time, and it's initially advertisement free. (source)
Moreover, Pandora has yet to prove itself as a viable long-term business model. The majority of its users sign up for ad-supported free service but its ad revenue ($119 million) is not enough to cover its costs while it must also contribute 45% of its revenue to royalties. (source)
In terms of the social media space, LinkedIn has historically been boring as it is constantly overshadowed by the more fashionable and exciting Facebook and Twitter. This changed as soon as it IPO-ed; however, its current valuation is questionable.
LinkedIn makes $12 million in profit a year but investors have treated it as a $9 billion company. Although the market for a hiring solution is huge, it is unclear how much market share LinkedIn can realistically take given the pre-existing competition that has existed long before LinkedIn. (source)
However, there does seem to be some headway that could potentially drive more jobseekers to LinkedIn. The company recently announced a partnership with Taleo (TLEO) that would streamline a job seeker’s ability to apply for around 5 000 companies by auto-filling information from Taleo’s “Universal Profile” service. (source)
These hot stocks will soon cool and may end with more reasonable price-earnings ratios. Presently, the uncertainty behind their business models as well as the hype behind them does not make them smart investments.
However, there are plenty of buying opportunities out there. Here are 3 stocks that are both undervalued and are more prudent choices than the latest IPOs. The following stocks are undervalued according to their growth price (FCF) using a 15% discount rate.
Microsoft is currently undervalued by 12.94%. Its new Windows 8 operating system received generally good reviews from developers and tech blogs and may lead Microsoft into the age of ‘cloud computing’ by tying together its software for PCs, tablets and phones.
If Microsoft can unload Bing while increasing its dividends, it will become a more attractive stock and deliver more value to its shareholders.
51% of Oracle’s revenue originates from software “maintenance” deals, which gives it greater stability than other software vendors. This maintenance stream will allow it to control it costs, navigate choppy waters and protect itself better than any of its mega-cap peers especially in a difficult macro-economic decline. (source)
A 10-year financial history reveals an impeccable management of cash and its investments and a consistent maintenance of a strong economic moat.
Intel Corporation (INTC)
Intel is currently undervalued by 28.36%. It boasts a very strong balance sheet with a TL-to-TA 0.22, excellent management of cash and maintenance of a healthy profit margin and pricing power.
Intel’s new mobile processor will power Google’s (GOOG) Android “Honeycomb” operating system. This is a mutually beneficial deal where Google gets another major processor building chips for its platform while Intel is given an opportunity to provide chips for the broadest smartphone platform in the world. (source)
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.