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TheStreet Open House

In the Year of Facebook, Beware the Social Media Stocks

Stocks in this article: GRPNLNKDPZZNGAANGIYOKU

2. 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.

3. 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.

4. 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 Apple (AAPL) or Google (GOOG) or Microsoft (MSFT)? When the panic comes, the playbook will be to dump high-flying stocks like these ones to protect yourself.

5. The roadmap for these stocks is Youku (YOKU). 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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At the time of publication, Eric Jackson was long YOKU.

Eric Jackson is founder and Managing Member of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. In January 2007, Jackson started the world's first Internet-based campaign to increase shareholder value at Yahoo!, leading to a change in CEOs in 2007. He also spoke out in favor of Yahoo!'s accepting Microsoft's buyout offer in 2008. Global Proxy Watch named Jackson as one of its 10 "Stars" who positively influenced international corporate governance and shareowner value in 2007.

Prior to founding Ironfire Capital, Jackson was President and CEO of Jackson Leadership Systems, Inc., a leadership, strategy, and governance consulting firm. He completed his Ph.D. in the Management Department at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management and Corporate Governance, and holds a B.A. from McGill University.

He was previously Vice President of Strategy and Business Development at VoiceGenie Technologies, a software firm now owned by Alcatel-Lucent. In 2004, Jackson founded the Young Patrons' Circle at the Royal Ontario Museum in Toronto, which is now the second-largest social and philanthropic group of its kind in North America, raising $500,000 annually for the museum. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson.

You can contact Eric by emailing him at eric.jackson@thestreet.com.

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