Don’t Fall for the IPO Feeding Frenzy
Last Wednesday, LinkedIn (NYSE: LNKD) traded for the first time on the New York Stock Exchange. Exuberant buying quickly pushed share prices up from an offer price of $45 to more than $122. And in the process, co-founder Reid Hoffman became a billionaire.
LinkedIn is just the latest in the slew of high profile IPOs and private equity deals that are trading for insanely high valuations. At the end of April, my colleague Greg Guenthner wrote to you about the similarly lofty valuation that was being put on social media giant Facebook – a company that the private equity markets have valued at $72 billion. That enormous price tag puts Facebook at four to five times the premium that’s being seen by the likes of Apple (NASDAQ: AAPL) or Google (NASDAQ: GOOG) on the public markets.
There’s clearly a valuation bubble in the private equity markets right now – one that you should avoid at all costs as a penny stock investor.
I’ll be the first to admit the fact that initial public offerings (IPOs) hold a special place in the hearts of small-cap stock investors. After all, the vast majority of all new stock offerings are for small companies that don’t see the same fanfare that social media stocks are seeing right now.
But for all but the wealthiest, most connected investors, it’s impossible to get a “good value” on any of these new firms in the current environment.
The trend doesn’t look like it’s slowing either. On Monday, Russian web search firm Yandex (NASDAQ: YNDX) opened for trading with an $11 billion market capitalization. Other prominent tech firms, like real estate data site Zillow have listings pending. And right now, I’d suggest avoiding all of them.
The fact remains that private equity firms are paying outrageous valuations for these growing web companies – and while their businesses may be attractive, the prices that private equity investors need to get to stage a successful exit make the possibility of making long-term gains incredibly difficult. There are a bevy of reasons why it doesn’t make sense for upstart names to claim massive premiums over mature, entrenched companies like Google or Apple – so, while enamored amateurs may sink their cash into these fundamentally queasy IPOs, you’d do well to avoid them.
That doesn’t mean that you should sit out the IPO game completely. While private equity backed internet IPOs are generating overpriced valuations, there are still quite a few upcoming public offerings in other industries that investors should be watching.
Some of the more interesting names include computer storage firm Fusion-io (expected to price on June 8), solar energy utility Brightsource Energy (pricing date to be announced), and private label retailer Bluestem Brands (pricing date to be announced). With more value opportunities in these lower profile names, investors actually stand a chance at getting in on the ground floor.
We’ll keep you updated on these IPOs as more details become available.
May 26, 2011
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