25 March 2012

IPOs & Performance of FB’s Peers

I'm thinking about Facebook (FB) IPO. One must recognise the difficulty of adding a correct “price tag” to an internet-based tech company. How much is worth its user base? How important is the current revenue model, and how much weight to give to the possibility of “extracting money” from this user base in the future? How much does matter the timing of the IPO? Etc. The data below about the IPOs of the selected FB’s peers illustrate this puzzle.

I chose to look at what has happened with the stock prices of the following companies since the IPO:
The choice is a bit subjective to capture the different points in time for IPO. Among others, FB has also indicated these companies as peers in its Registration Statement.

The Table below summarises the IPO dates for the selected companies, the performance of the stocks during the first trading day, and change since the IPO till the day this article is written (which is 23 March 2012).

We see that in most cases, the price to start with has either been terribly wrong or the markets have reacted very irrationally or both. Compare for example Yahoo! and Amazon.com. Yahoo! stocks skyrocketed immediately, while Amazon.com started out in minus. However, by today, the stock price of Yahoo! (adjusted for dividends and splits) has “only” increased by 13.6 times compared to almost 100 times of Amazon.com. Let’s even not mention the intraday volatilities of LinkedIn stocks during the first trading day. What is interesting to note is that at the end, all of these companies seem to turn into amazing success stories even for the first “outside” investors.

The other issue what one might be interested in, is the timing of the IPO. How much does it matter for a good start? The following Figure provides an illustration about the first 180 trading days of the explored six FB’s peers.

In short we can say that yes, it does matter. Somewhat. For exampe, Netflix came to the market just after the collapse of the dot-com bubble 1995-2000; during the first 100 or so trading days its stock price lost half of its initial value. LinkedIn entered the market during the times of high volatility and uncertainty, and this is clearly reflected in its stock price. Amazon.com on the other hand was lucky enough to arrive just before the market lost its mind, and so after a few days of struggling, its stock price picked up crazily. When it comes to Google and VMware then it’s difficult to tell anything about the large movements in their stock prices without digging deeper. The value of Google seem to have been underestimated at the outset, while the markets appear to have been confused about the VMware.

The next Graph provides an illustration about the volatility of these internet-based tech stocks. Don’t even bother with identifying the lines of every single company. As an example, just note Yahoo!: during the peak of the dot-com bubble its stock price was more than 100 times of that at the outset, and almost eight times of what it is today.

Against this backgound, what can be concluded about the FB’s IPO and its timing? Most probably:
* The IPO price will be wrong as there simply appears to be no reliable analysis method for estimating the value of such companies. Furthermore, most probably it will be overestimated at the beginning due to the methods being used (perhaps I’ll write more on this in a later post).
* There will be high volatility. Among others, this implies that at some point during the first year it should be possible to get the stock for a much better price than the IPO price (whatever it exactly will be).
* During the coming couple of years or so, it should also be possible to reap nice profits as the tech sector and advertising industry seem to be on track of losing their minds (once again). At the same time, there is still plenty of room when compared to the peak of the dot-com bubble.

In any case, it will be interesting to see what happens this time.

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