This year has been abuzz with a new wave of Internet and Social IPOs. They make headlines, often pop on opening days and spawn endless speculation on investment potential. There’s even a social media ETF. But the question remains: Can they succeed in the market–or on a more basic level, are they even good investments?
The answer is not good. Social and Internet companies this year are trading on average almost 25% down from their offer prices. Compare that to the 2011 class average of down 10%, or even the NASDAQ despite just a slight fall of 1% year-to-date.
A quick scan of the social and internet companies that comprise this group provides some answers for this trend. A number of them are Chinese IPOs, which we’ve looked into before. Some other companies struggle with questions about business models and profitability (Groupon, FriendFinder and Active Network to name some). Even the two positive companies, Zillow and LinkedIn, face hurdles as they move forward.
Like the very first wave of Internet IPOs, many of today’s new companies will be able to turn themselves into long-standing profitable businesses. Others will fall from the industry and leave others to take up the charge. But their underperformance compared with the market is an interesting observation to keep in mind, especially as the onslaught isn’t over yet. Yelp, Zynga and a potential $10 billion Facebook behemoth are still to come.