A big wave of tech IPOs is hitting the market, spurred by high enthusiasm and even higher valuations. The hottest IPOs are for companies with a social media aspect, which is widely touted as the second internet. In particular, the three hottest upcoming IPOs are expected to be Groupon, Facebook and Zynga.
TUTORIAL: IPO Basics
It's hard to believe, but the online coupon site is only a little over two years old. According to the Wall Street Journal's (WSJ) Deal Journal, Groupon went from a modest $30.47 million in sales for 2009, to nearly $645 million for just the first quarter of 2011. Given such amazing growth, it's no surprise that Groupon is probably the most anticipated IPO that we know for certain is coming. Unlike Facebook and Zynga, Groupon recently filed the required documents with the SEC.
Not everyone is excited by Groupon though. Groupon skeptics are eager to point out that the company's top line growth is partly deceiving. Groupon only keeps a portion of that number, reflected in its gross profit, which is only about 40% of its revenue.
But that isn't the worst thing. As incredible as Groupon has grown in income, it has also grown its expenses even faster. As the site continues to scale up massively, it has continued to lose huge amounts of money each quarter. Setting aside these issues, it seems that many people sense that there is strong potential in a company that can manage such a tremendous growth rate. Current valuation levels would put the company at about a $20 billion implied value - about the same as Yahoo!. (For related reading, see The Economics Of Group Buying Sites.)
While most commentators are pretty certain that Facebook will go public, there is still much speculation as to when it will happen. Though some had hoped for a 2011 debut, the company has yet to file papers with the SEC. When Facebook does go public, it's going to be huge. Some think the company is worth as much as $100 billion. That would put Facebook in the same league as Pepsi Co, Bank of America, and ConocoPhillips - big shoes to fill.
TUTORIAL: IPO Basics: Don't Just Jump In
Under SEC rules, companies must disclose their financial information once they have over 500 investors. The WSJ's Dealbook blog reports that many believe that the company will file for an IPO at that point since the company will be required to make many public filings anyway.
Prospective investors will be happy that Facebook turns a profit, though it seems unlikely it will trade at anything close to its fundamental value in the current market environment. More likely, if you want to get in, you'll have to pay some very high multiples based on the hope of rising earnings two or three years out. (For related reading, see Alternative Ways To Invest In Facebook.)
Farmville creator Zynga is expected to announce an IPO soon, but so far, those reports have turned out to be only rumors.
In January, the New York Times Dealbook reported that company insiders, including CEO Mark Pincus, have indicated that they are not particularly eager to sell their shares in the company. The company has thus far managed to raise sufficient funding from private sources, meaning that there is no financial necessity for an IPO.
As a private company, little is known about Zynga's finances. However, many commentators expect that Zynga is highly profitable. Valuations of the company outline a wide range, all the way from $5 billion in January, to up to $15 billion in June.
The Bottom Line
IPOs are exciting opportunities to buy in to previously unavailable companies. Just don't let your emotions get in the way of making sound investment decisions. (For more, see What Are Social Media Sites Really Worth?)