Capitulation is a financial term often described as when investors completely give up on a stock and sell it at any price. It usually includes high volume and rapid declines as panic selling takes over the market. Some investors enjoy capitulation, because it can provide an attractive discount and a fresh start once the selling is done. However, the key is to consider business fundamentals, be patient and wait for the right time to buy.
The year started off with much excitement and hope for popular Internet companies. At the end of 2011, Groupon (NASDAQ:GRPN) and Zynga (NASDAQ:ZNGA) both filed their initial public offerings. Meanwhile, Facebook (NASDAQ:FB), the world’s largest online social media website, went public in May. Although the outlook seemed promising for these companies, reality quickly set in for the digital juggernauts. All of the previously mentioned names now trade well below their IPO price.
Groupon, which was called the fastest-growing company in Web history, went public last November at a price of $20 a share. However, as the chart below shows, the daily deals company has not been a good bargain for the retail investor. Shares have plunged nearly 80 percent from their IPO price and currently trade near $4.50. On Tuesday, shares touched $4.34, marking a fresh all-time low. Between accounting issues and low-barriers to entry, Groupon had problems from the start. Now, the company faces even more obstacles as reports indicate that hundreds of resumes from Groupon are appearing at other tech companies. Unfortunately, when shareholders and investors jump ship, problems are likely to carry on for the long-term.
The rise of social media also brought a new way to play video games. Zynga, the creator of Farmville and Words with Friends, experienced a meteoric rise from an IPO price of $10 in December 2011 to $14 only two months later. As it turns out though, pumping out new hit games and selling virtual goods is harder than previously thought. Shares have dropped 66 percent year-to-date and recently hit a new all-time low of $2.66. On the positive, shares increased 7 percent today as capitulation may finally be ending and investors are willing to take a chance on Zynga. JPM Securities also initiated coverage on the company at Market Outperform.
Facebook (NASDAQ:FB) is another well-known social media company that recently found a friend from an analyst. Rory Maher from Capstone Investment, upgraded Facebook to Buy from Hold, citing the valuation looks compelling following the recent selloff. He also established a price target of $26 on shares. While the upgrade is certainly welcomed by those still holding Facebook shares, it provides little comfort in the wake of things. The company still needs to figure out its monetization strategy, and shares are down almost 50 percent since its IPO price of $38. The company also hit a new all-time low of $18.75 after the recent post-IPO lockup expiration, which gave early investors such as Microsoft (NASDAQ:MSFT) and Goldman Sachs (NYSE:GS) an opportunity to dump shares.
Facebook is perhaps the most compelling opportunity in the social space, given its large user base, but investors should keep patience in mind as there are many more lockup periods coming. Another 243 million shares are set to be released from lockup between mid-October and mid-November. On November 14, more than 1.2 billion shares will be available for trading and another 149.4 million shares a month later. The final round of lockup expiration does not occur until May 2013, when 47.3 million shares are set free. Confidence will be other hurdle to overcome, as Billionaire Peter Thiel, one of Facebook’s earliest investors, unloaded 20.1 million shares. For the time-being, Facebook appears to be just another social media name gone wrong for the retail investor. Furthermore, it certainly does not help that Morgan Stanley (NYSE:MS), its lead underwriter, was the same lead bank for Groupon and Zynga.