Before the Facebook (FB) IPO, many of the tech darlings had very high valuations that hinged on the expected price of Facebook shares when they finally come on the market. Since the IPO and the tremendous fall of Facebook shares in the first few days of trading, many of the other tech darlings have not come back down to earth yet. Much of these stocks' prices is based on supply and demand and the Facebook IPO flooded the market. After Facebook's initial price debacle, I believe there will be fewer buyers in the market for these new tech stocks. In this article, I explain why Linkedin (LNKD), Zillow (Z), and Pandora (P) were all hurt by Facebook's initial performance and where they should drop to in the coming months.
1. Linkedin Corporation
Linkedin shares were trading at $102 after hours on May 29th, up 82.2 percent from its 52 week low of $55.98. Despite falling from its peak of $120 over the past month, I believe shares should fall a lot more. Facebook is still worth more on a per user basis, but this is highly justified. Social networks make their money by leveraging their large user bases and serving as a platform that connects users to an array of different services. Linkedin has done a great job serving as a platform for people to network and find employment, but Facebook could eventually serve as a platform for everything. I believe Linkedin should have dropped with Facebook because much of Facebook's value drop stemmed from investors overestimating the value of the social platform. I expect LNKD to drop to around $80 in the next few months.
2. Zillow Inc
Zillow has been performing very well as of late. Shares were trading 28.4 percent about their 200 day moving average at the close of May 29th trading. The company is expected to increase its EPS 5 fold from 2011 to 2013, increasing from 13 cents to 65 cents. Not only would its $39.59 share price still be overvalued if it hits its earnings, but I also believe that Zillow will disappoint on its expectations. Although Zillow's idea of mapping out real estate and making it very searchable is great, but the company still has a lot of work to do in the way of cleaning up its site. Zillow's database contains 100 million homes in the United States, and much of the information it uses is out of date or incorrect. In addition, a large portion of the listings, especially ones in major cities, are scams, and take a lot away from what the website has to offer. I expect shares to drop to around $30 within the year.
3. Pandora Media Inc
Pandora's value proposition is very similar to Facebook in the use of banner ads to make money. A lot of the fears that have risen with Facebook have stemmed from its users failing to use banner ads. Pandora also faces more challenges when it comes to staying on top of its industry. New music streaming companies pop up all the time and tend to put profitability in the rear view mirror in order to gain popularity. Pandora faces a high risk of losing its advertisers and customers to this competitions and could struggle to stay profitable if more startups burst onto the scene, which is highly likely in the next few years. I expect Pandora shares to drop from these $10.60 price in after-hours trading on May 29th back to around $9 in the next couple of months.
Despite a lot of tech darlings having good performance since the IPO, many had bear runs along side Facebook. Zynga (ZNGA) dropped around 15 percent since the IPO and Yelp (YELP) dropped over 8 percent. The line between a company's social value and its business value are being drawn and a lot of the tech darling stocks should take a hit because of this. Currently, I suggest avoiding these companies entirely for now and picking up some value buys on the valleys. I wouldn't suggest shorting these stocks for now because of their unpredictable performances and expensive borrowing costs. As these companies' growth stabilizes and the losers are weeded out, it will be a lot easier to make value buys with the tech darlings.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.