Stephen Logan

Internet Industry IPOs: Overpriced and Overhyped?

4th Jul 2011 News, Industry News 3 minutes to read

The dreaded Internet Bubble Mark 2 has been looming large in recent months; with a huge multi-billion dollar stock floatation for the likes of LinkedIn, Demand Media and now Zynga, some might say  a crash is inevitable. The vast sums being invested in relatively young businesses, many of which might be deemed faddy or even having already peaked, there’s certainly plenty to suggest that investors are getting a little carried away.

However, isn’t that the whole idea of investment? Taking risks on young, up and coming businesses happens in every market, as the rewards can be much greater. As with any form of betting, you can’t guarantee that you’ll win every time, but you can certainly use the information available to make an educated guess and put the odds in your favour.

Internet businesses attract more attention and investment because of their potential. Companies like LinkedIn, Yandex and Demand Media [Source: Business Insider] already have healthy balance sheets, therefore they are reasonably ‘safe’ – at least for now. With the Panda update coming shortly after the Demand Media IPO, there was a certain inevitability about the drop in value. Therefore after starting at around $22 and peaking at $24.55, the stock has quickly fallen down to a little over $13 – a drop of 41%.

Zynga, the online game creator responsible for FarmVille amongst other titles, which is currently valued at around $10 billion, is next up for an IPO [Source: Exclusive: Zynga About to File for IPO | AllThingsD]. Last year the company made a profit of $400 million, which is hardly small change. Plus, with new titles in the pipeline and commercial tie-ins assured, the future could be bright. However, in the same regard, it may have already reached its pinnacle. The social games market could crumble and their income go with it – that’s the risk investors have to take.

The first dotcom bubble happened as a result of overzealous investors wanting to snap up online real-estate, with or without any form of track record. Fledgling companies simply grew too fast and without any form of control or basis for future expansion. Whilst the Internet is still a relatively young medium, most companies and investors should have learned the lessons of a decade ago.

However, if you choose to buy into the idea of LinkedIn being a $9 billion company, that’s the risk you take. Just like those who bought Northern Rock shares in good faith, there’s always a chance of a disaster on the horizon. In fact LinkedIn has probably been a good model for those who argue against a second bubble. Whilst it started at over double its original valuation of $4 billion, the stock has fluctuated – dropping down to around $64 – but has now returned to $90+.

Google+ may crush the viability of LinkedIn, it may have no impact at all. Zynga may run out of ideas, with FarmVille and Mafia Wars fading back into obscurity and representing the high tide mark; alternatively social gaming could become an even larger market and the company could spearhead new initiatives for years to come. Facebook could crumble and die a death after its planned (record breaking) IPO next year, or perhaps not. Google’s stock value is 400% than it was seven years ago when it floated; whilst this may be a one off, investors are always on the lookout for the next big thing.

Internet-based industries can be temperamental. What’s massive in one year could be obsolete the next, as many would now argue Digg or MySpace are. Equally though, big companies can also grow to become even bigger companies. Therefore it is undoubtedly risky, but high IPOs aren’t necessarily indicative of an imminent crash. Angel investors certainly haven’t been deterred and I doubt Wall Street traders will be any different.

Just like this post, it can only ever be speculation. Will Zynga be overpriced on IPO? Have other recent stock roll outs been overhyped? Past form might suggest so, but the future could be very different. Come back in a year when Facebook potentially rolls out its own $100 billion IPO and we might just have a clearer picture. For now though claims of a bubble are a little premature.

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