They will sell a lot more of their stock to get as much cash as they can.
More important than the insider VCs and CEOs being able to sell their shares is the fact that most of these companies will want to sell a great deal of additional equity to the market this year in order to beef up their cash reserves. It would be imprudent if they didn't. For example, with Groupon, their stock is still valued at $12 billion. That's 10x what they should do this year in revenues. If I were on Groupon's board -- as smart people like Starbucks' Howard Schultz and Ted Leonsis are -- I would be pounding the table telling them to raise as much cash as possible at this stage.
Their growth rate will be slower than expected.
At this point in the life cycle of all these young companies, hope springs eternal. The future is endless possibility. There have been -- at least for most of these companies -- few if any real disappointments... yet. And that's a big word. On Tuesday morning, Groupon's shares dropped as much as 9% to below their offer price when an investment bank released a study showing that its merchants intend to use the service far less this year compared to last year. On a huge risk-on day for the market, Groupon tanked. This survey is being read as future intent, but what will happen to Groupon's stock once it releases earnings which unmistakably show a slowing in growth? Investors will decide that this stock deserves a much more "human" price-to-sales number and that's significantly lower than where it's trading at present.
When you need to raise cash, why would you hang on to these stocks?
None of us knows exactly what will happen in the markets this year but most of us expect there to be at least as much volatility as last year. There's also a feeling among many -- including me -- that there's bound to be some unexpected negative market event this year: a tsunami, a flash-crash, the euro break-up, panic selling. When those times come -- and you got to believe they will -- why will investors hang on to these social media stocks as opposed to
? When the panic comes, the playbook will be to dump high-flying stocks like these ones to protect yourself.
The roadmap for these stocks is Youku (YOKU - Get Report).
The Chinese online video site Youku is a good role model for what will likely happen to most of these social media stocks. Youku flew out of the gate in Dec. 2010 and -- within a few short months -- touched $70/share. Its lock-up ended in June. About three weeks before, its stock started to head south. It then announced a large secondary offering. The price kept dropping. It's now at $16/share, even though its results have marginally improved in the intervening time. The company has well over $500 million in cash on its balance sheet, so it can't really complain. It's just the folks who bought in at the $60s that have been really hurt.
So, buyer, beware with all these social media names in 2012.
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