The year 2011 was tumultuous for stocks. The eurozone crisis and a U.S. credit downgrade kept investors nervous, but one industry held steady, even faring better than in previous years: technology.
About the same number of technology companies went public this year as last year. Difference is, they managed to raise more than $6 billion — a whopping 85 percent increase over 2010. Compared with all other industries, tech companies saw the highest returns in the first week of trading, according to PricewaterhouseCoopers. Still, analysts say it’s important to look beyond the stock price for real value.
The year was big for mega brands. The biggest name in the mix was Groupon, which went public in November and raised $700 million. It was a splashy debut for the Internet discount company, but analyst Sam Hamadeh isn’t optimistic.
“If you want, buy the coupon, not the stock,” he says. “Buy the coupon, don’t buy the Groupon.”
Hamadeh is the CEO of PrivCo, which analyzes the financial data of companies across sectors. He says tech is a great investment because it makes valuable products with low labor costs. That’s not the case for Groupon.
“Groupon effectively is a local advertising and couponing company. What that requires is a lot of local salespeople,” he says. “It’s very labor-intensive business.”
Groupon stock is worth nearly 30 percent less now than its closing price on Day 1. Not a great sign — though not as bleak as Zynga.
The maker of FarmVille, the popular game on the social network Facebook, mints real dollars by selling imaginary goods — like tractors that plow cornfields that only exist on a computer screen.
The closing stock price on Day 1 for companies that go public is typically higher than the initial offering price. Not Zynga — though it priced its stock low.
“It’s embarrassing to the investment banks that took them public,” Hamdeh says. “It was a failure by almost any measure.”
But Peter Coles, a professor at Harvard Business School, has a different take. He points out how much Zynga raised in its IPO.
“A billion dollars is a fantastic amount of money,” he says.
Zynga’s IPO earlier this month raised more than Groupon’s, and became the biggest tech IPO since Google’s in 2004.
The success story of 2011 was LinkedIn, the online Rolodex. It had a first day pop. Investors paid well above the asking price, and the stock is now worth 40 percent more than when it debuted in May.
On the surface, it makes no sense. Millions of people on LinkedIn don’t pay a dime. Why would investors pay? Coles explains the business model.
“That’s where you are. That’s where your contacts are. It’s not worth our time to join another LinkedIn, Rolodex-like substitute. And recruiters are willing to pay a lot of money for access to this fantastic user base,” he says.
Think of the company as a party host. One side comes in for free. The other side — in this case, the headhunter — pays to enter.
Zillow is among the smallest companies to go public this year. The website lets people look up real estate prices, even through cellphones.
CEO Spencer Rascoff says that short of a strong network, you’ve got to inspire loyalty.
“It’s all that more important in technology for products and services to tug at an emotional heartstring,” he says. “Another website is just a click away. Another mobile app is just a click away.”
The most anticipated tech IPO in 2012: Facebook.
“The beauty of Facebook is that it is impossible to leave,” Coles says.
It’s the best of the 2011 companies, on steroids. Tech savvy, strong network, loyal users. Some say it’s worth $100 billion. We’ll know for sure when it goes public.