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Dot.Com IPOs – Should One Invest? (Startup Series: Episode 4)

UPDATED: Facebook stocks slide further and now at the lowest ever. Shares of the No. 1 social-networking company ended the day down $3.14, or 11.7%, to $23.70, which not only notched a new low but also marked a nearly 40% decline from the company’s initial public offering price. (SOURCE)

Facebook IPO. IntraSoft Technologies ( IPO. MakeMyTrip US IPO. And innumerable others. What do all of them have in common? Riding on highly inflated valuations from direct advertising revenues, affiliate advertising revenues and expected earnings over the years; they hurried off to do an IPO. Result – A lot of fan fare in the Press & TV; and finally came the fall. From grace. Straight to the ground.

The worst side is – Senior management immediately cashed in to their Employee Stock Options and turned billionaires, overnight. The ‘institutional investors’ were hit the worst. Lets take a look at all 3 of these above mentioned companies; since time of their launch to current day scenario.

IntraSoft Technologies, BSE: 533181, NSE: ISFT, listed on 12 April 2010, as 140/- share price, now worth less than 52/- in July 2012. The fall is not much to any wrong-doing on ISFT’s part, rather owing to uncontrollable market conditions. The depression hit just after the IPO, EU went into crisis, thus, most of the revenues for ISFT which came from online ad spaces, and CPM/CPC/CPA/CPL commercial email marketing campaigns; got badly hit. Clients ran fewer campaigns, ad spendings went down, and thus, revenues dried up. And the worst part is – is an online e-card greetings card site; which itself is a dying industry. No one now really visits an e-cards site to send greetings! Million other options available – mobile apps, iPhone apps, Facebook apps and others.

IntraSoft Tech stock slide over the years. Institutional Investors got hit the worst. Whatever you’ve invested in 2010 for a long-term holding is now worth less than a dime.

MakeMyTrip, another highly over-rated and over-evaluated company, went the same way. Initially touted by media as the ‘Best IPO in the US in 13 years‘, as it says in economics – ‘CORRECTION comes sooner or later, but definitely does come’, correction came. And the stock crashed. Now, back on ground from a stellar orbit.

Touted as one of the most successful IPOs in US history, MMTrip is now a case study of the ‘mistakes an online company should not make’.

In MMT’s case, the fall/correction is owing to their highly over-evaluation. Lets look at MMTrip’s rounds of funding:

  • Raised $1 mn in the seed round (eVentures),
  • $10 million in Series A (SAIF partners),
  • $13 million in Series B (SAIF Partners, Helion and Sierra).
  • MMT closed Series C investment of $15 million from Tiger Fund and the three existing venture capital investors – SAIF Partners, Helion Venture Partners and Sierra Ventures.

TOTAL = Around $40 million in funding.
And thus came automatic pressure from Investors to exit. Thus, the IPO.
Result – MMT filed with US regulators for an IPO and planed to raise $100 mn  from the offering. Initially, in 2009 itself, but the bad economy probably resulted in the delay. Managed to raise $70 million, and became just the 4th Indian company to complete its IPO in the US since 1999. Stock price did rally in the first few weeks; and then the correction came. Rest is history.

But as it so happens, humans are the only animals, whose memories are very short-lived. Thus, in 2012, came the mother of all ‘dot-com IPO fuck-ups’. The ‘Debacle on Wall Street’; Facebook IPO. Loads of articles there for you guys to read, what the fuck happened?

Worries that Facebook’s shares were overvalued and concerns that the company would not be able to grow revenue fast enough had pummeled shares lower by as much as 32% from the May 18 IPO price of $38. After a disastrous IPO and a dismal showing in the weeks that followed, shares of Facebook are finally showing real signs of life. The tide may be turning.

One thing that is common is – ‘the market does correct over-valued companies‘. Analysts (god knows which universities they got their economics/statistics degrees from), valued Facebook for $100 Billion. After the correction, now its worth even less than $70 billion.

WHY THE CORRECTION – if you may ask? The following is an excerpt from an excellent article which explains WHY Faceook which was so highly over-valued, now has been corrected. Reason – the company is now burning cash, and revenues/margins are both falling.


The biggest problem Facebook faces is the deceleration of its revenue. The market doesn’t like deceleration, especially when a company’s profit margins are already as high as Facebook’s. At a 50% operating margin, Facebook’s profit margin is likely to go down not up. So Facebook’s earnings are only likely to grow at Facebook’s revenue growth rate–or slower.

Facebook Quarterly Revenues Growth

Facebook S-1

Facebook’s growth rate in Q1 was a modest 45% year over year. (See the red line in the chart here. Click for ginormous chart).

That’s down from 55% in Q4 of last year, which itself was a sharp slowdown from the prior quarter.

Advertising revenue growth in Q1, meanwhile, was an even less impressive 37%. This for a company that many people keep saying is a huge threat to Google. For the record, Google’s display-ad business, which competes directly with Facebook’s display-ad business, is growing faster than Facebook’s.

For further comparison, Google’s revenue is also 10X as big as Facebook’s. And Google has more cash flow than Facebook has revenue. But the market is still valuing Facebook at 1/2 of Google’s value.

Facebook’s free cash flow, meanwhile, has gone negative: The company is now burning cash.


Because it’s spending so much on data centers.

If Facebook’s revenue growth doesn’t reaccelerate in the rest of this year, it could end up posting revenue growth of less than 40% for the year. That’s impressive growth for a normal company, but it’s not all that impressive for a company trading at this valuation.

If Facebook’s growth doesn’t reaccelerate, but, instead, continues to decelerate, there’s no reason Facebook should have a multiple that is so much higher than that of other tech leaders, like Apple and Google.

Coming back to the Indian e-commerce market, is planning to go for an IPO in early 2013. Read whether “Flipkart is in Trouble?” here. Unless you’re having millions stacked up as black money in foreign off-shore accounts, and wish to invest in this scenario, here’s a few easy pointers, on how not to loose money on this IPO.

> Once the market valuation of Flipkart is out, assume – actual price is less than half of the quoted price.
> Whatever the listing price of the stock will be, expect it to be quarter (if worse) or half (if good) in less than 6 months.
> Hold on to cash, and invest for a good sum of stocks 6-12 months down the line, when the stocks have corrected – If planning for long holding.
> If planning for short-selling, make sure you do purchase the stocks at high price, and sell off when the stocks are shorting. But not advisable to hold on for a while.

And whatever you do – don’t make the mistake that some of my friends and acquaintances did if you’re employees at these organizations. Once your company exits with an IPO, don’t buy stocks. Rather, if you have Employee Stock Options, sell them off and cash in. Longer you hold on to the stocks, you loose more. Unique example – Mark Zuckerberg and friends cashed out stocks worth millions of dollars, before Facebook stocks plunged. Thus, idiot institutional investors lost millions, when, he himself cashed out, riding the wave and made billions. This is the nature of the game.

Thus, when the Flipkart IPO does come, don’t loose money being an idiot. Be smart.

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