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The IPO Market's Post-Facebook Reality

NEW YORK ( TheStreet -- The IPO world is now divided like an ancient calendar of history -- between the BF period - that is, Before Facebook (FB - Get Report) -- and the AF - that is after the IPO cataclysm. In the earlier period, BF, the fantasy of overvaluing Internet stocks was alive and well. After Facebook? Well, reality bites.

In that fuzzy and warm pre-Facebook era, you could highly price an Internet company like Zynga (ZNGA), a gaming company associated with Facebook, at $10 billion in value when it went public. The reality of the market now puts it at a more realistic $2 billion.

Other companies are now suffering the post-Facebook reality check. LegalZoom, for instance, is making an AF market debut. Had the company jumped into the public market a few months ago, it probably would have commanded the price it wants. Not so now.

LegalZoom is hoping to price its offering in the range of $10-$12 a share, which values the company at 40x last year's earnings. At the high end of the range, that gives LegalZoom a valuation of $483 million. The company did log revenues of $156 million in 2011, but only booked net income of $12 million.

LegalZoom is a leading online source for legal documents, but it does not provide legal services. The company recently began to promote a subscription service, presumably to smooth out its earnings. Unfortunately, it hasn't been able to demonstrate a consistent profit stream.

The positive takeaway with LegalZoom is that it is a growing company whose sales have increased and whose losses have been trimmed. It has also taken very little in outside cash, which is impressive.

The market though is concerned that the offering seems to be primarily a way for the existing shareholders to bail out at the expense of new investors. More than half of the stock in the offering is coming from existing shareholders. If they aren't sticking around, why should a new investor jump in?

E2open (EOPN) has also learned the perils of the after market. This cloud company priced at $15 on July 26, but immediately traded down.

"I think our investors are looking at where we are going to be in the future," Mark Woodward, the company's CEO, told CNBC, "not necessarily where we are trading today."

But initial valuation of the company at $442 million looks inflated when you consider this disclosure in its filing: "Throughout most of our history, we have experienced net losses and negative cash flows from operations." The company only booked $56 million in revenue last year. LegalZoom starts to look pretty good compared to that.
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