Internet IPOs Still Overvalued? GRPN, LNKD, P, ANGI

November 18, 2011, 09:25 am ET, BY Patrick- Contributor, Stock Traders Daily| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Overall, it has been a tough year for the IPO market. When the stock market began to tank in early August, as contagion fears spread throughout Europe and the world, new deals became non-existent over the next two months. However, as we head into the holiday season, the IPO market has been percolating as companies rush to the public markets before the end of the year.  This week has been especially busy for new deals, with the IPO market once again highlighted by a popular internet company – Angie’s List (Nasdaq: ANGI). There has been a number of highly-touted internet IPOs this year, but the exorbitant valuations of these deals have had some people calling it “Internet Bubble 2.0”.  But, since going public, these IPOs have seen their valuations come crashing down, most of which have been hit harder than the market in general. With this is mind, it begs the question as to whether these stocks are now attractive at these lower valuations.

Groupon a Deal?
The immensely popular local-deals company, Groupon (Nasdaq: GRPN), has been one of the year’s most highly anticipated IPOs. The local deals phenomenon has transcended the way many people shop, and GRPN’s membership rates have shot through the roof.  There is no denying that the company’s top-line growth rates have been astounding (+2,600% for the first nine months this year), but the company has spent hundreds of millions of dollars in marketing to achieve those rates. Because of this, GRPN is nowhere near profitability, which means using a P/E ratio to judge its valuation is out the door. Like most of these internet-related IPOs, the best metric to use is P/S, given that most are not yet generating significant profits. When GRPN opened for trading at $28 back on November 4, it had a ridiculous trailing P/S of ~57x, based on FY10 figures. But, if we annualize its revenue for FY11, and use today’s market cap – which is materially lower than it was a couple weeks ago – its P/S slides to a much more reasonable 11x. Relative to other internet stocks, its not as bad as some may believe, but the fact that GRPN’s business model may never churn out consistent profits makes many hesitant about it.

Investors Not Connecting With LNKD
After soaring out of the gate, professional networking site LinkedIn (Nasdaq: LNKD) has fallen on tougher times. Its stock is down almost 40% from the highs it achieved on its first day of trading. The company has reported earnings twice since going public, most recently reporting a “beat and raise” quarter on November 3. The upside results weren’t enough to impress, though, as the stock continued to slide lower after the print. The problem is, with a P/S of nearly 16x, investors and traders will nit-pick at every flaw found. For instance, LNKD’s operating margin fell to 3.3% from 8.8% in the prior quarter, causing it to report a net loss compared to a $0.02 gain a year earlier. On a forward basis, LNKD is looking a bit more attractive, with a P/S of 9.3x based on FY12 revenue estimates. Again, though, with no sign of meaningful profitability on an annual basis any time soon, LNKD still doesn’t seem like much of a “bargain.”

Hearing the Music
Pandora Media (Nasdaq: P), the online radio company, is another IPO that made a lot of waves when it went public on June 15. It was an IPO that appealed to many everyday people/investors, because so many are familiar with and use its service. But, from a business perspective, there are gaping holes in the story. While its revenue has grown at triple digit rates, rising content costs and increasing competition are eating away at its bottom line. The good news is, its valuation looks more reasonable today. Based on FY12 expectations, it is trading with a forward P/S of ~4.7x. At these levels, P does look somewhat attractive as a shorter-term trade idea, especially since its trading near key support at the $12-$12.50 level.

Highly Rated
The one internet IPO that has bucked the trend, and has actually performed very well, is Bankrate.com (Nasdaq: RATE). The company, which is an online publisher of financial content, was bought out in August of 2009 by investment funds advised by Apax Partners. Its return to the public markets has thus far been a successful one, as the stock is currently up ~35% vs. its IPO price. The company does well when interest in financial news is high – especially when people are interested in lending rate – which has certainly been the case.  RATE is coming off a strong Q3 in which it beat on both the top and bottom lines, with revenue growing a robust 60% year/year. Furthermore, its valuation looks quite reasonable with a forward P/S of about 4x, and the company is actually profitable. Out of this group, RATE is stacks up the best in my opinion.

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