Groupon has cooled off, following its hot initial public offering, but investors are still hot for Internet offerings. Zynga, the online games company, is due to sell stock later this month at a lofty valuation, and Facebook is moving toward a monster IPO that could value it at $100 billion.
Barron's has been skeptical on two of the largest Internet IPOs this year, Groupon (ticker: GRPN) and LinkedIn (LNKD), the Internet professional networking company—as well as the entire sector ("Groupon Gropes for Growth," Oct. 31, "Yes, It's a Bubble," July 25, and "Is LinkedIn Already Tapped Out?" May 23).
Groupon and LinkedIn still look pricey. Groupon debuted at $20 a share in early November and surged to $26 on its first day of trading. The stock hit a low last week below $15 before ending Friday at $19. At that level, the company is valued at $12 billion, or a stiff eight times projected 2011 revenues of $1.6 billion. Traditional profit measures aren't helpful because Groupon operated around breakeven in the third quarter, although bulls say it will become profitable in 2012 and ultimately mint money as local merchants around the world use Groupons (discounted merchandise and service coupons) to entice new customers.
Groupon is the leader in the "daily deals" sector, but its business model is unproven, and its growth is slowing amid strong competition that is cutting into its margins. Too, consumers who are bombarded daily with coupon offers from Groupon and its rivals could be coming down with "deal fatigue." The number of Groupons sold in the third quarter was little changed from the second quarter at 33 million, while the company's "take rate" of deal revenues slid to 37% from 42% a year ago.
There isn't a lot of visibility about Groupon's international business, where much of its growth is occurring. If Groupon's growth continues to moderate and the profits fail to materialize, the stock could drop under $10.
LinkedIn went public at $45 in May and quickly jumped as high as $122. It now trades at $68, or 240 times projected 2011 profits, 127 times 2012 estimates.
Zynga, the developer of such popular online games as CityVille, FarmVille and Words with Friends, at least is profitable. It filed Friday to sell 100 million shares in a price range of $8.50 to $10 a share, which, at the high end of the range, would value the company at $7 billion.
Zygna's revenue growth, mainly from Facebook users who pay for virtual goods to enhance the game experience, has been impressive, doubling to $828 million in the first nine months from $401 million in the same period a last year. Operating profits grew to $82 million from $55 million. With a $7 billion market value, Zynga would be valued at more than 60 times potential 2011 pretax profits—and a higher multiple of after-tax earnings.
The Wall Street Journal, meanwhile, reported last week that Facebook is eyeing a 2012 IPO of as much as $10 billion that would value the company at $100 billion. That's well above its $72 billion value Friday in the private market for its shares at SharesPost. Facebook is believed to be on track to bring in $4 billion revenue this year and is solidly profitable. The key questions are its future growth rate and the appropriate equity valuation.
A $100 billion valuation for Facebook looks rich when you consider that investors can buy the still-expanding Internet leader, Google (GOOG), for a much lower multiple of revenues and profits. At $620 a share, Google is valued at $205 billion, or nine times estimated 2011 net revenues of $29 billion and 17 times estimated 2011 profits of $36 a share. The effective P/E drops to closer to 14 when you strip out Google's $42 billion in cash.
At a generous 10 times next year's potential revenue of $6 billion, Facebook would be worth $60 billion. Google trades at a more-reasonable six times next year's estimated revenue.
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