A little more than a decade ago, investors gobbled up any company that came public with a “dot com” or “e-“, as in “e-mail”, in its name. For a while it was a guaranteed way to make money. It was about page views and potential, not P/Es or profits--new times called for new rules. On August 10, 1999, the NASDAQ Composite index closed at 2,490.11. Just seven months later, on March 10, 2000, it maxed out at 5,048.62. Then reality set in. Over the next two and a half years, the NASDAQ fell to a low close of 1,114.11. For a bit of perspective, the NASDAQ has been recently trading around 2,650. Why the history lesson? There has been a resurgence of IPOs from companies that derive all, or most, of their revenue online. We will look at the prospects of the following companies: Groupon (NASDAQ:GRPN), LinkedIn (NYSE:LNKD), Netflix (NASDAQ:NFLX), Open Table (NASDAQ:OPEN), Pandora Media (NYSE:P), Que Pasa (QPSA), Zillow (NASDAQ:Z) and Zynga (NASDAQ:ZNGA). (Zynga is scheduled to begin trading on December 16.) Please consider this article as a starting point for your own due diligence.
With shares recently trading around $22, Groupon is on the lower side of its 52-week trading range of $14.85 to $31.14. The market capitalization of Groupon is $14.19 billion. Even though it has a loss per share of $2.16 over the last year, it has been generating exceptional revenue growth—quarterly revenue has grown 426.0% over the past twelve months. Even that growth, however, doesn’t offset the risks. Until Groupon establishes a way to differentiate itself from any current or future competition, it is too risky of an investment right now.
LinkedIn’s shares have traded between $55.98 and $122.70 over the past year. At a recent share price around $71, LinkedIn has a market capitalization of $6.95 billion. Even though LinkedIn earned $0.07 per share over the past year, it has a p/e ratio of 976.58 and a PEG ratio of 30.06. (A PEG of 1 is the dividing line at which a company can be considered over- or undervalued.) Given these two metrics, this company is extremely overvalued and should be avoided.
Netflix is a somewhat different animal. It has solid numbers, but its recent history is the bigger concern. Over the past six months, its shares have cratered from a high of $304.79 to a new low of $62.37. Recently trading around $75, Netflix has a market capitalization of $3.95 billion. It’s earned $4.40 per share over the past year, giving it a reasonable p/e of 17.10. It has grown its quarterly revenue by 48.6% during that year. After a couple of management missteps, the company’s strategy is more important than its execution. On a fundamental basis, this stock seems to be a reasonable investment, but until management regains the confidence of the market, look for something with more certainty.
Open Table’s shares have been trading around $36 in the past few days. At this price, the company has a market capitalization of $854.80 million. Although shares are near the low end of the company’s 52-week trading range of $31.54 to $118.66, it has posted earnings per share of $0.80 over the last twelve months. The company has been growing both revenue and earnings per share over the past year with 40.1% and 5.8% growth rates, respectively. The company trades with a high p/e ratio, 44.82, but, with a PEG ratio of 1.13, it isn’t as overvalued as some of the other company’s discussed within this article. Even though the shares seem reasonably priced, there doesn’t seem to be any substantial barriers to entry for potential competitors. If you want to add a little risk to your portfolio, this may be a good fit, but pay attention to whether it attracts significant competitors.
Pandora Media’s shares are trading near the bottom of their 52-week trading range of $9.15 to $26.00. With shares trading around $10 each, Pandora has a market capitalization of $1.60 billion and has reported a net loss of $0.22 per share over the past twelve months. While Pandora has been able to grow quarterly revenue by 99% over the past year, its earnings have actually declined over the same time frame. While Pandora has established itself as the frontrunner in internet radio, it still faces stiff competition. Rivals like satellite radio’s Sirius XM and broadcast radio’s Clear Channel are making inroads into the internet arena, proving that relatively low barriers to entry will lead to more competitors. While this may pay off in the long run, there is no need to rush into this stock and it should be considered a hold for the time being.
Quepasa Corp. is the Latin American answer to Facebook. It’s shares are trading under $4, near the bottom of its 52-week trading range of $2.74 to $15.45. At this price, the company commands a market capitalization of $61.84 million. Quepasa has reported a net loss of $0.40 per share over the past year. While the company has reported year over year quarterly revenue growth of 59.3%, it has achieved negative growth and operating margins of 68.11% and 57.22%, respectively. It has also reported negative free cash flow over the past year. Until it regains its footing, shares in Quepasa should be avoided.
Shares of Zillow, Inc. recently traded around $24, giving the company a market capitalization of $657.03 million. At this price, the shares are very near the bottom of its 52-week trading range of $21.2 to $60. The company has reported a net loss of $0.01 per share over the past year. Even though Zillow is growing quarterly revenue at the rate of 131.6%, investors should look for another spot to invest their money.
Zynga is the maker of video games played primarily through Facebook. The games are provided to Facebook users for free. The company generates revenue by charging players for in-game purchases and transactions. This may well be a new strategy for monetizing web content. Zynga should be watched for this reason alone. Shares of the company begin trading at the end of this week.
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