Are Social Media IPOs Being Overvalued?

Maybe not entirely, but according to one analyst the deal with Groupon’s IPO is a no-brainer, don’t go anywhere near it. Reuters reports that Forrester E-Commerce Analyst Sucharita Mulpuru took a look at Groupon’s filings with the SEC and was shocked at how the company had attained such high initial valuation. According to Mulpuru, “There is no rational math that could possibly get anyone to the valuation Groupon thinks it deserves…This IPO game isn’t about finding value, it’s about finding a greater fool who actually believes the valuation is true. Trust me, you will be the fool.”

Having not turned a profit in its two years of operation, posting net losses of over $100 million dollars in the last quarter, Groupon’s financial stats aren’t lending the discount deal-swindler credibility from investment wizards. But warnings from advisors such as Mulpuru are not dissuading bankers involved in the IPO, who are still talking about valuing the company at over $20 billion dollars. At that valuation, Groupon would trade at 100x revenues, which seems a little above-par for a company that 1) doesn’t have a net income, and 2) has only been around for two years.

Does this crazy IPO valuation point towards the emergence of a bubble in the social media market? Silicon Valley hedge fund managers and entrepreneurs Peter Thiel and Marc Andreesen were interviewed separately in recent weeks, and barraged with questions about a bubble on the rise in the valley. Both men vehemently denied the growth, or existence, of any current bubble in the tech market. With Groupon’s latest valuation, what are these Valley giants seeing that we don’t?

Zynga, maker of hyper-popular online games Farmville, Cityville, and MafiaWars, will be the next social media enterprise to go IPO after Groupon. Although Bloomberg reports that the San-Francisco based company will employ a different tactic in its debut, going with the “low float” approach that worked so well for LinkedIn (NYSE:LNKD). The “low float” strategy consists of offering a very small percentage of shares to public investors initially in an attempt to keep demand high and drive up the stock price. If the initial “float” is successful, the company will usually make additional public share offerings until they believe demand has been met and a stable price level is reached.

The forthcoming IPO will be led by Goldman-Sachs (NYSE:GS) with official filings expected to be made in the coming weeks leading to an eventual market debut later next month. Although financials for the company are not yet available to the public, Zynga reportedly made $9.28 billion in revenues last year. Perhaps Mulpuru would pass easier judgment on this company.

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