Social media IPOs: gold mine or new bubble?
Social media stocks are hot on the eve of Facebook’s historic initial public offering, but there are a lot of questions surrounding this new industry.
Eric Jackson’s article from thestreet.com gives 5 reasons why social media stocks are bound to fail:
1. They will become much more liquid in 2012 as their lock-ups end. (“No matter what, there starts to appear a lot more of the company’s equity on the market starting six months or so after an IPO. When this occurs, the stock price typically gets pulled back to earth.”)
2. They will sell a lot more of their stock to get as much cash as they can. (“More important than the insider VCs and CEOs being able to sell their shares is the fact that most of these companies will want to sell a great deal of additional equity to the market this year in order to beef up their cash reserves.”)
3. Their growth rate will be slower than expected. (“At this point in the life cycle of all these young companies, hope springs eternal. The future is endless possibility. There have been — at least for most of these companies — few if any real disappointments… yet.”)
4. When you need to raise cash, why would you hang on to these stocks? (“When the panic comes, the playbook will be to dump high-flying stocks like these ones to protect yourself.
5. The roadmap for these stocks is Youku (YOKU_). (“The Chinese online video site Youku is a good role model for what will likely happen to most of these social media stocks.”)
We believe there are a few simple questions investors should ask themselves before jumping in to these new IPO’s:
How do these companies make money?
- How do they plan on producing and sustaining growth?
- What factors are relevant in the valuation of a social media company?
- Are these stocks the next equities bubble?
We will be monitoring these companies closely throughout the year. Send us an email and let us know what you think about Facebook, Groupon(GRPN), LinkedIn(LNKD)Pandora(P), Zillow(Z), Zynga(ZNGA), Angie’s List(ANGI) or any other hot social media websites.
Read more from Eric Jackson: In the Year of Facebook, Beware the Social Media Stocks
“Always invest your time before you invest your money”
Chesapeake Investment Services
Managed Futures Specialists
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