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Olga Vlasova
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As a part of Business Development team at Consensus Analytics she advices hedge funds on operational estimates and detailed consensus data they can use in their company analysis to help them gauge street's expectations. Prior to Olga's work in Consensus Analytics she was a part of investment... More
  • WARNING! The Shares Are Highly Risky! 0 comments
    Oct 17, 2012 5:28 PM | about stocks: AAPL, CSCO, GOOG, GRPN, LNKD, ORCL, YELP, ZNGA, FB, T

    "WARNING: THIS COMPANY HAS NO ASSETS OR EARNINGS AND WILL BE UNABLE TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE. THE SHARES ARE HIGHLY RISKY." - This should be the introduction on the main page of the IPO SEC fillings for most, if not all, social media stocks.

    Since financial market is cyclical it's seems like it's a good time for another boom. The madness of the crowd has a track record of going after hot IPOs disregarding any basic valuations. Examples can be tracked as far back as to the beginning of the 18th century's South Sea Bubble or the early twenties of the 20th century. While the South Sea Bubble enjoyed both a meteoric rise and a catastrophic crash a period from 1920-1930 is a good example of desperation about speculation. Just when the country was on the rise and industrial corporations began trading their stocks speculation became a national pastime. Opening with a 179.5 P/E multiple in 1928 American Telephone and Telegraph (NYSE:T) was valued at 335.5 in the beginning of 1929. Bethleem Steel grew from 56 to 140 gaining 146.8% in its value. Radio Corporation jumped from initially announced P/E of 94.5 to 505 in eighteen months and ended up at 2.6 two years later. Exception was a relatively safe AT&T , which lost only ¾ of its value while other lost about 95%.

    The "tronics" boom is another cycle of "frenzied" investments but I'll let the numbers takes care of the explanation:

    (click to enlarge)

    Investors didn't' really care what each one of these companies made as long as it sounded "electronics" or "technology". Just like in a later "DOTCOM" boom-and-bust cycle.

    With the technology developing and both people and companies becoming more mobile and socially active in online social media space, it shouldn't be surprising to see social media IPOs at "sky rocket" prices. "Cash out and let others deal with the fallout" could be a logo of most of the recent social media IPOs. Each company has suffered a dramatic and shocking decline after advertising promising high growth valuations. Although most veteran investors still remember the ups and downs of "tech mania" and recognize the similarities in internet stocks many of them get involved in the new generation of "internet mania" that leaves all venture capitalists just as clean and dry as in earlier booms.

    (click to enlarge)

    Just a couple months ago these companies were interpreted as a part of the next technology revolution that, as everyone believed, promised to avoid the errors faced 10-12 years ago.

    Similar to Tech stocks internet stocks like Facebook (NASDAQ:FB), Zynga (NASDAQ:ZNGA) and Groupon (NASDAQ:GRPN) are approaching their end these days. "It appears the market went a bit ahead of fundamentals in welcoming these companies with largesse valuations".

    Facebook had all investment banks fighting to manage the book for its IPO. It seemed like the entire market was so much into this fight about "bragging rights" that the core function and company's valuation got neglected. The stock has lost more than 37 % of its value in two months and analysts keep predicting even more downside from current levels. Investing in companies like FB is not easy and the question is not within "beat-up" financial ratios but in the actual necessity of it. Unlike Google (NASDAQ:GOOG), Cisco (NASDAQ:CSCO), IBM, Oracle (NYSE:ORCL), which provide the world's major distribution of services, Apple (NASDAQ:AAPL) that's in the process of monopolizing the category of luxury technology, Facebook "is not an integral part of global economy and its cool brand is rapidly fading away". Although LinkedIn (NYSE:LNKD) has a similar business model it serves a very well defined purpose and both its idea and a product have proven functional.

    Zynga , a company that is famous for producing games for Facebook, has lost more than 67% this year alone. Zynga can't survive without Facebook. It's a dependent entity and its games are struggling to find any takes on current mobile platforms.

    Groupon's stock has lost over 63 % of its value in 2012. Although the company deals with real products and services and seems to be able to monetize their active business accounts pretty quickly, the company still lacks a good business strategy leaving many previous businesses highly unsatisfied with their services.

    YELP is another failing story. I still wonder why investors continue keeping their faith in this stock thus letting it to maintain its value. As a more modern application of old days "Yellow Pages" Yelp is entitled to be a free review provider. Current Yelp's business model doesn't not provide its clients with definable ROI because many deals are closed offline with no track record. In addition, there is very little control over deals, which allows free accounts to be represented as "active" without paying for additional features. Performance wise, company's sales efficiency stays very low compared to Groupon or Citysearch while expenses maintain a solid 60%-69% margin.

    One important thing we all should understand about glamour internet stocks is that they're not usually a solid and sustainable investment. These stocks have a track record of appreciation in value solely based on the number of investors who get carried away by the hype surrounding internet stocks. And just like in previous boom-bust cycles , a few quarters down the row the stock depreciates and we blame investment banks, company's management and everyone involved for not providing us with proper valuations of IPOs. On a smaller scale if internet companies bust the history of stock markets will record another example of "madness of the crowd" while on a bigger scale, the process of transferring wealth from public markets to Silicon Valley's bank accounts will result in a loss of confidence in crucial function of local capital markets and IPO processes.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Themes: etf-analysis Stocks: AAPL, CSCO, GOOG, GRPN, LNKD, ORCL, YELP, ZNGA, FB, T
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