by Dee Gill, Y-Charts
The Facebook (FB) fiasco has spooked a lot of tech investors, especially those holding shares of recently-launched social media companies with similarly unproven earnings streams. Perhaps it’s a nice opportunity to buy shares in Zynga (ZNGA), Yelp (YELP), Angie’s List (ANGI) and the like. Or maybe it’s more like the wake-up call Boo.com gave the market with its bankruptcy in 2000: the one that made everyone suddenly remember that even a wildly popular product won’t save a company that can’t make money.
Facebook’s problems naturally spill over into these other companies because they point out how little anyone understands about valuing these businesses. Facebook shares dropped 19% share on the first few days of trading, largely because of questions about whether it could really meet the earnings marks investors wanted. Issues of fairness over sharing projections with potential investors just exacerbated that underlying problem. Witness some stock charts that need training wheels:
For investors in similar young companies, Facebook’s IPO exposed the sheer guesswork involved in forecasting financials for these new media companies. The ads-for-onlines services revenue model is still young and unpredictable. Facebook’s own underwriters apparently cut its 2012 profit forecast by nearly 6% shortly before the offering.
Investors at Yelp and Groupon (GRPN) were worrying about iffy forecasts even before the Facebook IPO. Recently, with its first-ever report as a public company, Yelp produced a quarterly loss about double the size of what analysts forecast. The customer review site apparently spent a lot of cash on marketing and sales. Investors haven’t forgiven the miss.
Groupon, a website that charges businesses to advertise and sell their discount coupons on its site, most famously botched its numbers both before and after its November IPO. Its last restatement involved a big charge for refunds. These mistakes cost shareholders dearly.
Angie’s List (ANGI) shares have swung wildly and are currently down about 25% from its November launch. The company, which charges consumers membership fees to see customer reviews of local businesses, reported a 76% gain in sales for the first quarter but a $13.5 million loss. (That’s up from a $9.6 million loss the previous year.) It wasn’t a surprise, and paid memberships rose 81% in the quarter. But there’s some impatience for actual earnings.
Zynga, a company that runs games on Facebook, made its investors very unhappy in March by spending $180 million to buy a six-week-old game whose 15 minutes of fame appear to be done. Zynga says it will help earnings. Looks like investors aren’t convinced it will do enough.
These are, of course, very early days for these companies, which may yet go on to achieve great success for all involved. But the original dot com bust should have taught us that investing in hype and revenue growth that’s not paired with a steadily improving earnings stream is quite risky, especially when there are outsized valuations on the shares. Looks like we’re learning.
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About the Author
Dee Gill is an editor for the YCharts Pro Investor Service which includes professional stock charts,stock ratings and portfolio strategies. YCharts® Pro offers proven stock ratings, data downloads, portfolio strategies and avanced stock screening. Free 14 Day Trial is available.