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TheStreet Open House

Facebook's Share Drop Shows Yelp Made a Mistake

Stocks in this article: Z LNKD YELP TRLA FB

NEW YORK (TheStreet) -- Facebook (FB - Get Report) shares are down sharply Tuesday, losing 5.2% to $47.89, following a downgrade from Raymond James, and a broadly weaker tech sector. However, the story is much bigger than the world's largest social network and travels all across Silicon Valley.

High-growth technology stocks such as Yelp (YELP - Get Report), LinkedIn (LNKD - Get Report), Facebook, Groupon (GRPN)Zillow (FB - Get Report) and Trulia (TRLA - Get Report) have seen their equity prices rise sharply this year, backed on exceptionally strong revenue, changes in the perception of the companies, and a lack of growth elsewhere. That's where the similarities between those companies end, however.

While everyone loves a high stock price, it's important for management to be fiscally prudent with that as well and raise cash when the time comes, taking advantage of the public markets' interest in their stock. Zillow filed a secondary offering in August. On the company's second-quarter earnings call, I asked the company whether it filed an offering to take advantage of the company's run-up in its shares.

LinkedIn did a secondary offering last month, and actually priced it too low given the insatiable demand for the equity from portfolio managers.

Facebook doesn't need to raise additional cash, having had the largest initial public offering in technology history, but the other companies most likely should have taken advantage of the run-up in their shares.

Yelp, for example, had $96.8 million in cash and equivalents on its books as of June 30, 2013. Yelp recently purchased SeatMe, a Web and iPad-app based reservation solution for the restaurant and nightlife categories, spending $2.2 million in cash and up to approximately 263,000 Class A common shares. Buying a company and paying for it with a large portion in stock is all well and good if the stock price is high. Cold hard cash is a different story, and can be used for acquisitions no matter what the public markets are doing.

Trulia had $215 million in cash and equivalents on its books at June 30, but given the breakneck pace competitor Zillow is acquiring companies, having recently acquired StreetEasy to get into the New York City rental market, Trulia may be forced to overpay for acquisitions if it wants to keep up.

It's highly possible the aforementioned companies could be working on raising capital right now, taking advantage of the public markets interest in their stocks. It's not like I know their plans, and they sure won't tell me them.

Investors need to be aware, though, that a prudent management team, led by its chief financial officer, should understand public markets and take advantage while the iron is hot. Otherwise, it may be too late.

--Written by Chris Ciaccia in New York

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