Although 2011 is not yet over, it appears it will be a dismal year for the IPO — initial public stock offering — market. As of September, according to statistics compiled by market tracker Dealogic and reported in The Wall Street Journal, 63 percent of all 76 IPOs were trading below their initial pricing. Internet firms, while having first day gains of 28 percent versus seven percent for non-Internet IPOs, have seen their values plummet, down eight percent on average from their original pricing.
According to stock market research firm Birinyi Associates, which tracked 30 Internet-firm IPOs in 2010 and 2011, 18 of the 30 stocks are below their IPO price and 24 of the 30 are below their opening prices on the first day of trading.
To some extent, the initial prices of Internet stocks are always inflated because companies offer a very small percentage of available shares, driving up the price. Across all industries, companies typically offer investors about 20 to 25 percent of their shares. In contrast, Google sold 7.2 percent of its shares and Groupon sold a mere 5.5 percent, the second smallest share float in the United States in the past ten years. Pandora sold 9.2 percent and LinkedIn sold 8.3 percent of their shares.
Let’s look at the performance of five of the most publicized Internet IPOs of 2011 and examine the prospects for Zynga, another highly anticipated prospect that went public this past Friday.
This personalized Internet radio company went public on June 15th. Shares were priced at $16; the stock opened at $20 and rose as high as $26 on the New York Stock Exchange on opening day. On December 14, the stock closed at $10.22, putting the company significantly underwater. While its revenues continue to grow, Pandora has never made a profit.
The daily deal coupon company that I analyzed earlier this year went public to much fanfare on November 4th. It was priced at $20 a share, rose to $30 on opening day and then dropped to $14.85 in late November. Shares spent much of the first half of December under $20. On December 14 it rallied to $22.55. Groupon has never been profitable. Of the banks that initiated coverage of Groupon on that day, seven gave it a neutral rating while four started it off with a buy. The company’s three underwriters, Morgan Stanley, Credit Suisse, and Goldman Sachs, all were enthusiastic about being part of the IPO. Now however, lead underwriter Morgan Stanley issued a target price of $27 and recommended to potential investors that they “wait for a better entry point to build a position.” And Deutsche Bank issued a target price of only $21. But Goldman Sachs stated that Groupon held “the key to unlocking the massive local advertising market with which the Internet has long struggled,” and initiated its coverage of the stock at $29.
This business-to-business social networking company went public on May 19th at $45 a share. On the first day, the stock rose to almost $110. At the time LinkedIn’s underwriters — Bank of America, Merrill Lynch and Morgan Stanley — were criticized for setting the price so low. Analysts suggested LinkedIn should have been priced at $90 a share. However, LinkedIn is one of the few Internet companies that has never dipped below its initial offer and closed at $65.95 on December 14th, so perhaps the underwriters were correct in their conservative pricing. LinkedIn states that it has been profitable since 2006.
This company provides real estate market information for consumers and real estate professionals. It was listed on July 20th when it was priced at $20 and went as high as $44. For most of September it ranged between $35 and $37.50 but closed at $22.13 on December 14th. Zillow became profitable in its first quarter as a public company.
Contractor and healthcare provider review site Angie’s List waited 16 years before going public on November 17th. The IPO price was $13 and it rose to over $18 on the first day of trading. It closed at $16.42 on December 14th but had dipped below the IPO price early in the month. The company is not profitable.
I wrote about Zynga when it filed its S-1 Statement with the SEC this summer.
The company halved its intended valuation and was priced at $10 a share when it went public last Friday, based on “a review of the offering price and recent aftermarket performance of companies that completed IPOs in 2011,” Zynga stated in a December 9 regulatory filing with the SEC. Ten dollars a share values the company at about $7 billion. The IPO was a disappointment as the stock closed at $9.50 at the end of the day after briefly hitting $11 a share.
Will 2012 Be Any Better?
Two companies will likely go public early in 2012. Yelp, which has already filed with the SEC, is not profitable and is looking at a valuation of somewhere between one and two billion dollars. Facebook, will likely go public early in 2012. Facebook is reportedly — according to The Wall Street Journal and The New York Times — hugely profitable and could be valued at an astounding $100 billion.
In short, 2012 is expected to be a bumpy year for IPOs, which will be affected by the macro economic environment, and Facebook may be the only bright spot.