The new Internet darlings? Repent, ye business journalists
Recent initial public offerings from technology companies such as Facebook Inc., Groupon Inc. and game-maker Zynga Inc. have all disappointed long-term investors in the stocks.
Forbes outlined the troubles the three are having in an Aug. 21 story that argued that the tech firms should have considered going public earlier. They’re not alone. The business media has recently been jumping all over these companies, criticizing them as if they need to repent for being too bullish on Internet companies in the ’90s.
The thesis is that, because it’s so difficult to be publicly traded, no matter the environment, these firms would have been better off going through the growing pains of learning to be public earlier. The main reason: so the companies will learn how the public markets actually view their business prospects.
Groupon, which was valued at about $13 billion when it went public in November, was trading below $5 per share at the end of August. The stock has come under fire after the company reported disappointing second-quarter earnings, analysts questioned its status as a tech company and a star deal maker departed.
The news was bleak enough to prompt early backers Marc Andreesson, a veteran Silicon Valley investor, and hedge fund Maverick Capital to cut their holdings, which were acquired before Groupon went public. The Wall Street Journal also reported that several backers thought the company went public too soon:
Mr. Andreessen was among several Groupon advisers who urged it not to go through with its IPO as planned, said people with knowledge of the discussions. Starbucks Corp. Chief Executive Howard Schultz, who resigned as a Groupon director in April, also voiced worries that Groupon was going public too soon. So did John Doerr and Mary Meeker, partners at venture-capital firm Kleiner Perkins Caufield & Byers, a Groupon investor, said people familiar with those discussions.
Among their concerns was that Groupon would have to withstand tough scrutiny of high marketing costs and other aspects of its IPO plan, said people with knowledge of the Groupon board’s discussions. As board observers, and not directors, Mr. Andreessen, Mr. Doerr and Ms. Meeker didn’t have a vote in Groupon’s IPO decision.
Groupon Chief Executive Andrew Mason said in an email, “Our board unanimously approved engaging investment bankers to explore an IPO then months later unanimously approved us filing the S1, and then months later unanimously approved us going public.”
With the loss of key saleswoman Jayna Cooke, investors may have more to be concerned about. The Journal reported that Groupon’s sales force has helped fight competition since they’re able to make more deals with merchants, especially on the local level. The loss of a key dealmaker could signal discontent among the group of people on which the company relies.
Facebook, whose IPO troubles have been chronicled in every media imaginable, has come under fire as investors question if the company will actually be able to deliver on its plans. One of the biggest questions remains if Facebook will actually make money on new products, especially on mobile devices, the New York Times reports.
Some point to Facebook’s inability to manage the expectations of Wall Street investors as one of the major contributors to the stock’s recent slide. Paul Sloan writes in CNET that:
No one expects Zuckerberg to veer dramatically from his strategy, which, in brief, boils down to two key components: On the one hand, the company wants to persuade Madison Avenue of the value of Facebook as a new kind of social advertising medium. At the same time, it needs to solve the $64,000 question facing all ad-driven social media sites and amp up its efforts on mobile. Facebook’s story is strong: 955 million monthly users, more than half of them coming back daily; $922 million in revenue from advertising in the last quarter. But Wall Street isn’t in the mood for a `story.’ That’s so 1999. It wants proof, in the form of higher revenue and profit growth, especially considering that Facebook, despite the plummet in its share price, still carries a price-to-earnings ratio that dwarfs those of Apple, Google and LinkedIn.
Sloan goes on to point out that Facebook has the ability to sell a lot more ad space and to tap into the people using its mobile app. Facebook is allowing some partners to develop ads that appear in users’ new feeds to promote their apps; when users click on them, they’re directed to the app store for their device.
Many investors after the company’s IPO are impatient to recoup some of their losses and have having trouble understanding the short-term vision.
And then there’s Zynga, maker of popular games such as FarmVille. Bloomberg dubbed them the worst performer of the Internet companies in an Aug. 22 story. After losing more than 70 percent of its value since the December IPO, Zynga may come under fire from activist shareholders to pursue a deal, Bloomberg said.
The company needs to prove that it can curb its reliance on Facebook to distribute games and that it has a plan for making money on mobile services. CEO Mark Pincus controls just over 50 percent of the voting rights and said he would not consider selling. He’s been upfront about this since the beginning and investors should take him at his word.
All three companies are struggling to show they have what it takes to become the next Apple, Google or even, Microsoft. Many Internet companies have come out of the gate strong, only to flounder as a newly public company. The ones who are best able to calm investor fears while executing their strategic plans will gain long-term success.