Social Media IPOs Heating Up

Brittney Barrett  |

Focus and speculation regarding the technology sector, especially the recent IPO’s and observable investor zeal for social networking companies.  For months, there has been discussion of the potential for a bubble in this arena, driven by a desire among investors and venture capitalists to get in early, sometimes, analysts suspect in spite of the actual worth of the company. This was well illustrated by the flurry of recent IPOs, but especially the overwhelming success of the professional social networking site LinkedIn(LNKD) and Russia’s search engine outfit Yandex(YNDX), compared to the Google of Russia. In both instances, the stocks were priced at the high end of valuations but continued to ascend at a tremendous speed following the initial showing. The success of LinkedIn was especially worthy of note, with 7.84 million shares traded on May 18, the day of the IPO. Trading volume continued to rise, on the 19th, by a factor of nearly four times, marking the largest disconnect in supply and demand for any IPO in history.


The enthusiasm toward the opportunities at this juncture is largely the result of high population of interest in an area where there are still few pure plays available.  Zynga is the next tech name expected to debut an IPO, and the company seems primed to experience the same momentous rise as LinkedIn. Investors that may have missed the boat on LinkedIn or are merely attempting to throw their hat in this new ring are chomping at the bit for the next opportunity. Zynga, which creates social and mobile games such as Mafia Wars and FarmVille, toes the line between social networking a gaming; a factor that may contribute to the success of an IPO. The games offer less of a professional necessity than LinkedIn, but are nonetheless extremely popular and demand consistent play for success.   The popularity of the games has led some to believe that the market will value the IPO at between $10 and $20 billion. Both Goldman Sachs and Morgan Stanley have been discussed as potential candidates to lead it.

The strength of the IPO; however, can often betray the value of these social networking IPOs and the enthusiasm of the demand. Stocks tend to push higher too quickly, rather than the organic ascents of say, Amazon (AMZN) or even Google (GOOG), the latter of which took off quickly, but proved worthy of early valuations. LinkedIn, for its part reached $122.70 at the height of trading on the first day of the IPO with an initial price of $45. With a market value of over $ 8.26 billion, LinkedIn, has yet to do the same. The company, according to Bloomberg data, needs revenue growth of 144 percent a year, double its last two years combined, to equalize its price-sales ratio in line with the Dow Jones Internet Service Index by 2013.

Still this fact has done little to scare off investors and venture capitalists, who continue to look to these technology and social networking startups as an avenue into a ripe market. Certainly, while not all will meet their market valuations, when the demand is so high, that investors may be on to something when they realize attack at these still, somewhat early tech-IPOs. The interest in LinkedIn and Zynga is not without warrant. Zynga, for its part will be the first or second most valuable game company globally according to VentureBeat. Google executives, long recognized for being nearly psychic in their products and execution continues to support the game-layer. The company infused $85 million investment in Kabam, a maker of f 'hardcore' social games like Global warfare.  PopCap, is also in this vein: a gaming company that has attracted investor interest for its ability to exist as both a social networking tool and a game. Finnish developer, Supercell has gathered $12 million on this shared platform while,  the Turkish, Peak Games collected $5 million to create more games internationally, especially for Turkish, Middle Eastern and the North African market. The fate of these gaming companies and potential IPOs remains to be seen, but investors should realize they have a growing number of options

The other companies that have investors on their toes, hoping for an IPO are also well-established and tied to recent social phenomena.  Twitter, coupon site, music-genome project Pandora are all in the pipeline to file IPOs. Pandora actually filed for its IPO in February.




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