Are recent tech IPOs on the rebound?

Despite posting better-than-expected numbers, most tech stocks have not seen much bounce

Financial trends and news by Steven Loeb
February 24, 2013
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If you scooped up some newly-minted tech IPOs at the start of this year, your portfolio would be looking pretty healthy. Shares of Trulia are up 42%; Yelp shares are up 9% and Zynga is up 19%.

And, if you look at how far they come from hitting their lows of 2012, they're looking relatively strong. In fact, one could say that the environment for tech IPOs is becoming more favorable.

Many tech companies have come out beating Wall Street's expectations for the final three months of last year, and you're thinking about getting in on these shares, you don't want to wait until too many of these quarters pass you by. Otherwise, the stocks will run away from you. 

But will they?

Facebook shares at $27.13, while up 34% from a trough level of sub-$18 last year, are down 2% this year, and still well below their $38 IPO price. 

It may be worth waiting for another quarter before making a decision. But in the meantime, it's probably good to brush up on how these companies and their respective shares have been in performing. Then you can decide whether they look appealing.

Facebook - market cap: $64.4 billion

Shares of Facebook are $27.13, down  2% this year. They're up over 34% from hitting a trough of $17.73 last year. At current prices, Facebook is trading at 9.9 times estimated 2013 revenue.

In the fourth quarter of 2012, Facebook posted revenue of $1.585 billion for the quarter, better than Wall Street's estimates of $1.52 billion. Adjusted earnings per share came in at 17 cents in the fourth quarter, compared with the 15 cents a share that analysts were expecting.

Mobile MAUs were 680 million, an increase of 57% year-to-year. Mobile DAUs exceeded web DAUs for the first time in the fourth quarter of 2012. Mobile revenue represented approximately 23% of advertising revenue for the fourth quarter of 2012, up from approximately 14% of advertising revenue in the third quarter of 2012.

Total dvertising revenue was $1.33 billion, or 84% of total revenue. It increased 41% from the same quarter in 2011.

Oddly, though, Facebook's stock has actually sunk since posting these numbers on January 30th. Earlier in the month, Facebook share closed above $30 for the first time since July 13. And, except for one day, the stock continued to close above that range every day for the rest of January. Since February 1st, though, the stock has closed below $30.

So why would the market react this way to Facebook posting better than expected numbers, especially ones that show it is improving both its mobile numbers and advertising revenue? 

Some, like J.P. Morgan analyst Doug Anmuth and Andreas Pouros, COO at London-based digital marketing agency Greenlight, expressed surprise that the social network's mobile ad revenue was not even higher.

“Key to the demise of historical market leaders, such as Altavista in Search and MySpace in Social, was too much advertising”, Pouros said. “It served to increase revenue in the short term but undermined utility and loyalty."

"Maybe this is why Facebook’s mobile revenue numbers were lower than the market expected, with Facebook perhaps understanding this risk and not being as aggressive as it could have been with pushing ads to the masses. Doing so would have spiked short term revenue but at a potential long term risk.”

Clearly the market wants to see more from Facebook before it will truly be confident in its ability to generate revenue in the long run.

The stock ended Friday down 0.56% to $27.13 a share.

Yelp - market cap: $1.4 billion

Shares of Yelp are $22.18, up over 9% this year. They're up 30% from hitting a trough of $15.22 last year. They're up 32% from the IPO in March 2012. Yelp is trading at 6.54 times estimated 2013 revenue of $214 million. 

Yelp topped Wall Street’s expectations by raking in $41.2 million in revenue in the fourth quarter of 2012, up 65% over the year-ago period. This performance was at the high end of Yelp's own guidance and beat analysts' consensus expectations of $40.3 million.  For the full year, Yelp generated $137.6 million in revenue, up 65% from $83.3 million in 2011.

But Yelp is still spending too much money. While it narrowed its fourth-quarter losses to $5.3 million from $9.1 million in the same quarter a year ago, for the full year, Yelp lost $19.1 million, more than the $16.9 million it lost in 2011. 

After Yelp posted these numbers, JP Morgan's Anmuth wrote that while he does believe that Yelp will be able to continue to drive strong revenue, it may have impediments to profitability going forward.

"We believe Yelp’s breadth and depth of review content, trusted brand, and large potential local advertising opportunity make it well positioned to continue driving strong revenue growth and margin expansion," he wrote.

"We view potential changes to Google's search algorithm (which drives 50% of Yelp's visits), a relatively unproven track record outside the US, and a significant implied profitability ramp as risks to the stock at current levels."

Yelp's stock has remained relatively steady. After posting the results, shares were down 2.8% in after-hours trading to $21.75.  But they're up over 9% from $19.7 at the start of the year. 

They're also trading 32% above their debut price of $15, but below the high-point of that day. Recall on Yelp's first day of trading in March 2012, shares rocketed nearly $10, or 67%, to $24.58, and ended at $24.50, up 63%.

Yelp ended trading Friday up 0.82% to $22.18 a share.

Trulia - market cap: $698 million

Shares of Trulia are $29.59, up over 42% this year. They're up 49% from hitting a trough of $15.02 last year. At current prices, Trulia is trading 6.97 times estimated 2013 revenue of $100 million.

Trulia also came out ahead of expectations in its quarterly numbers. It posted revenue in the fourth quarter of 2012 of $20.6 million, up 75% over the same quarter last year. Wall Street was expecting $19.1 million, according to data compiled by FactSet.

That higher-than-expected revenue didn’t translate into a profit, though. The company reported a loss of $1.6 million, or $0.06 per share. That’s a huge improvement over the 30-cent per-share loss in Q4 2011, but analysts had been expecting a loss of just 2 cents a share.

These numbers have helped Trulia's stock rise nearly $5, or 15%, since February 12. The stock ended trading Friday at $25.56 a share, down 9.36%.

Trulia debuted on NYSE in September and had a solid first day, raising $102 million as shares soared more than 40% above its IPO price of $17.

Anmuth raised his price target on Trulia's stock from $21 to $29 and was positive about the compan'y position in the market going forward.

"We believe Trulia’s product platform and attractive agent ROI proposition—along with tailwinds from the secular shift online and a possible housing recovery—position it to significantly improve monetization and profitability over the next few years," he wrote. 

Zynga - market cap: $2.5 billion

Shares of Zynga are $$3.19, up over 19% this year. They're up 29% from hitting a trough of $2.11 last year. But shares are down 68% from their IPO price of $10. At current prices, Zynga is currently trading at 2.77 times its estimated 2013 revenue of $900 million.

Zynga went public in December 2011, but I am going to count it along with these other 2012 IPOs anyway.

In its fourth quarter results, Zynga reported GAAP revenue of $311 million, flat year-over-year, with bookings of $261 million, down 15% year-to-year. Earnings per share came in down 6 cents, while adjusted earnings per share was a penny.

Analysts had been expecting to see a loss of 3 cents per share on revenue of $212 million.

The company experienced a net loss of $48 million for the quarter, down 89% from its net loss of $435 million a year ago.

Full year revenue for the company was $1.28 billion, up 12% year-over-year, and bookings of $1.15 billion, down 1% year-to-year.

Shares shot up nearly 10% the next trading day to $3. The stock continued to climb the next few days, peaking at $3.67 on February 11, before steadily coming down every since.

Despite these numbers, analysts remained skeptical of Zynga's ability to create profitable games going forward.

Stern Agree analyst Arvind Bhati noted that Zynga still had to prove it could create hit games after losing its favored status on Facebook.

"Mgmt's focus on preserving/growing free cash flow should help limit downside to the stock. However, for any sustainable appreciation in the stock, we think the company needs to prove it can still create hits profitably especially after its favored status on the FB platform dissipates," Bhatia wrote. 

On its first day of trading, Zynga's stock broke through its IPO price of $10 a share and closed there. Zynga ended its debut day at $9.50, down 50 cents. 

The stock has slipped quite a bit since then ending trading on Friday up 7.77% to $3.19 a share.

2011 stocks

Two companies that went public in 2011 also recently posted earnings, and have both seen their stocks rise as a result. 

LinkedIn posted non-GAAP earnings per share of 35 cents on revenue of $303.6 million, up 81% from $167.7 million in the year-ago period, and well above the consensus estimates compiled by Thomson Reuters of 19 cents a share on revenue of $279.5 million. As a result, its stock rose 10% in after-hours trading to  $136.75.

LinkedIn is currently trading at $160.45 a share, up 29% so far this year, and up more than three-fold from an IPO price of $45.

LinkedIn is trading 11.9 times its estimated 2013 revenue of $1.4 billion.

Pandora released its Q3 earnings report in December, reporting income of over $2 million, or one cent a share, on revenue of $120 million. The company was able to beat Street expectationf of one cent a share on $117 million in revenue.

Pandora projects a loss for the next quarter of between 6 and 9 cents a share, on sales of $120 million to $123 million. Analysts had been projecting Pandora to earn a penny a share on revenue of $130.2 million for the quarter.  

As a result, Pandora shares plunged 18% to $7.74 after trading, but the stock has since bounced back and is now trading at over $12.13 a share. 

Pandora shares are up over 21% so far this year but down 25% from going public $16 a share.

What does this mean for future tech IPOs?

While all of these companies showed the ability to generate greater revenue than Wall Street expected, the market still seems unsure if there is long-term sustainability with most of these companies. Or they're unsure whether they're cheap enough.

Facebook's stock has dipped, Yelp's has remained steady and Zynga's, after peaking, is coming back down to its previous level.

Trulia, LinkedIn Pandora all seems to have impressed investors enough that they have confidence in its long term ability, though investors initially seemed to be scared off by Pandora's lower than expected projections and Trulia's stock was down almost 10% on Friday.

In the wake of Facebook' IPO a number of tech companies cancelled their plans to go public, including Kayak and Evernote. While Kayak eventually did go public, Evernote has decided to delay its IPO until 2015, at the earliest.

In a recent interview with me, Evernote CEO Phil Libin said that he chose that date since "by then the markets will have settled down and made peace with technology companies."

In recent years, Libin told me, there has been a struggle between the public markets and the technology companies. Technology companies have to take long-term views, years ahead in some cases, while the markets react to things within seconds, buying and selling based on rumors. This is a recent problem, one that is "not good for anyone" and is bad for innovation. But it is also one that Libin believes will correct itself eventually.

Another company that has seen a lot of speculation about going public is Twitter. While the social is expected to announce that it is going public at some point in the next year or two, it recently made a move that could be designed to delay its initial public offering.

It was reported in January that Twitter was brokering a deal that would allow investment firm BlackRock to buy up to $80 million of stock from a number of Twitter’s early employees, who have not had the opportunity to exercise their share options since Twitter’s last $800 million fundraising round in the fall of 2011.

By offering employee shares to BlackRock, Twitter might be avoiding reaching the 500 shareholder limit that would force it to automatically IPO before it would be fully ready to take such a step. All you have to do is look at what happened to the stocks of Zynga, Facebook and Groupon to see why Twitter would be wary of going public too soon.

Both Evernote and Twitter seem hesistant to enter into a marketplace that still doesn't understand how to deal with tech companies, and it's hard to blame them when you look at how they have reacted to the good numbers that companies have been putting up lately.

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