It is every investor's dream to find the perfect IPO that continues to grow in the foreseeable future. Some IPOs flourish for years to come while others diminish within a year, if not months. Today, I will focus on four popular IPOs from 2011. By and large, I believe each of these companies will ultimately lose momentum.
HomeAway, Inc. (AWAY) engages in the provision of an online marketplace for the vacation rental industry. In my opinion, HomeAway needs to invest heavily in its website architecture. As competitors such as privately-held AirBnB have continued to chip away at HomeAway's early mover advantage, HomeAway has failed to keep pace. The company's website remains clunky and outdated by modern web 2.0 standards. What's more, the company has generated a profit margin of 2.7% and a return on equity of 1.5% last year. HomeAway has a gross margin of 85% while its publicly traded competitor, Priceline.com, Inc. (PCLN), has a gross margin of around 69%. HomeAway's operating margin of 9.8% is higher than the industry average of 4%. HomeAway is currently spending a large amount to ensure that its growth increases. This move may lead to lower earnings in the near future. I don't see how the vacation rental market will consolidate to HomeAway's advantage considering the small barriers to entry to enter the space.
LinkedIn Corporation (LNKD) is an online professional network that allows users to create their professional profile and build a network. It has a market capitalization of around $8.5 billion. It generated a profit margin of around 2.3% and a return on equity of 3.2%. Like Homeaway and vacation rentals, LinkedIn had an early mover advantage into the professional social networking space. But also like HomeAway, the company possesses a very narrow competitive moat. If, for example, Facebook (FB) wanted to enter the professional networking space, Facebook could do so with ease. The same could be said for the Google Plus (GOOG) service. A real value investor would never touch LinkedIn at the current astronomical valuation. LinkedIn has a lower 5-year expected PEG ratio of 1.44 times versus Monster Worldwide's (MWW) ratio at 2.2 times. With a large number of members and a higher-than-average income, LinkedIn is a favorite among many unsophisticated investors. also recently acquired Rapportive, a company that makes software for social media integration. This acquisition may help decrease LinkedIn's development expense over time.
I believe we're in a period of very frothy valuations for internet stocks like LinkedIn. I also believe that for the next year or so, we'll see those valuations remain frothy as more and more tech companies IPO. But looking at the bigger picture over the long term, it doesn't seem like many of these companies will be able to fight off competition from competitors. If LinkedIn didn't have a slush fund of venture capital, it would have died a slow death years ago.
Spirit Airlines, Inc. (SAVE) is a provider of passenger airline services. It generated a profit margin of 7% and a return on equity of 45.3%.
Spirit Airlines has a gross margin of 27.7% and an operating margin of 13.8%. AMR Corporation (AAMRQ.PK), on the other hand, generated a gross margin of 19.7% and an operating margin of negative 1.2%. Spirit Airlines has a lower price-to-earnings ratio of 13 times versus the 17.2 times shown by another competitor, JetBlue Airways Corporation (JBLU). Spirit Airlines also has a lower 5-year expected PEG ratio of 1 time versus JetBlue's ratio at 1.3 times. It recently added Denver to its flight destination and has seen an increase in its earnings. Sure, the company is doing better than some other regional airlines. But do you really want a piece of this industry? Airlines are historically terrible stocks. Given the bigger picture (static wages, long-term unemployment), I don't see room for marked advances in tourism.
Then there's Spirit's other problem: It's a terrible airline that treats customers like cattle. If you've ever flown Spirit, you'll understand what I'm talking about. Customer service is shoddy, but prices are low, so that's what will keep people coming back for the time being. But across the board, airlines are competing on price. Airlines that once had a pedigree of great service like Jetblue and Virgin America have slashed prices. This trend will continue, and it doesn't bode well for Spirit.
Zipcar, Inc. (ZIP) is a car-sharing network that provides its members with services in metropolitan areas and university campuses. Zipcar has a 5-year expected PEG ratio of 2.25 times. Furthermore, Zipcar has shown great top and bottom-line growth. It is on its way to big highs with an added inclusion of an investment in peer-to-peer sharing. Zipcar's financials indicate that the company is headed in the right direction and buying stock now might seem like a speculatively good buy idea. I disagree. A non-profit company called CityCar Share has already entered Zipcar's community carshare market in the SF Bay Area with success. It's only a matter of time before other regional companies take more market share from Zipcar. Plus, there's the elephant in the room: Every rental car company. These behemoths move slowly. But sooner or later, they too will enter this carshare market. Once that trend happens on a wide enough scale, Zipcar will be in trouble. This capital intensive business has nowhere to go but down over the long-term.