3 Big 2011 Tech IPOs: Where Are They Now?

NEW YORK (TheStreet) -- Last month marked the one-year anniversary of Facebook's (FB) initial public offering, an event that was billed as larger than life.

Everyone wanted a piece of the action. But investors eventually learned the hard way that over-subscribing to an idea means nothing if it can't manifest itself into results.

I'm not going to absolve Facebook of the fiasco that surrounded its IPO. But there's not much a company can do when the market falls in love with its stock. The hysteria reminded me of the chaos created in the late 1990s when, out of nowhere, lousy companies pitched their tents on the Nasdaq at breathtaking valuations. All they needed was a Web site and a patent.

It's true that some nimble traders did well. But investors forget the IPO frenzy also caused a lot of damage.

Over the past several years, the IPO market has been, at best, hit or miss. The market's love affair with Facebook's IPO was just one recent example of how investors remain thirsty for instant gratification. While it's still too early to say definitively how Facebook will be looked upon down the road, the picture is much more clear for other recent IPOs.

We're going to look at three companies that hit the social scene a couple of years ago with equal amounts of fanfare only to have investors realize that, as in any IPO, there are no guarantees of long-run success as a company or a stock.

Sad Songs for Pandora

Pandora ( P), which is the market leader in Internet radio streaming with more than 7% share of total radio listening, has been playing plenty of sad tunes lately. The company first went public on June 15, 2011. The stock opened at $20 per share and soared to its all-time high at $26 until it ended its first public session at $17.35.

After its IPO, questions were raised regarding profitability. But why now? The company had not earned a profit in the 10 years prior to going public. It's as if the company's prospectus didn't matter and Pandora's business model was expected to suddenly change.

But Pandora surprised the Street in the third quarter of 2011 with its first-ever profit -- earning $638,000. It wasn't a huge number. But for Pandora, it got the doubters off its back.

However, the excitement faded. Ever since that surprising third-quarter profit, Pandora's results have been mixed. For every bit of good news, there was plenty of bad that followed, including a top- and bottom-line miss in the very next quarter. Management issued guidance that sent the stock down 41% since reaching its 2012 high of $14.75 on Feb. 6. The entire year was filled with ups and downs.

What's more, fears about increasing royalty payments and the dwindling advertising market sent the stock tanking to $7.08 on Nov. 16. But the stock didn't stay depressed for very long. Following two consecutive solid quarters, including a surprising jump in paying subscribers, the stock began making new 52-week highs -- reaching $19.37 on May 24.

Essentially, over a period of six months (November 2012 to May 2013) Pandora was able to gain 173%. But as has been the dancing pattern since its IPO, the company is now taking a step backward, to put it mildly.

The real question is, can Pandora survive now that both Apple ( AAPL) and Google ( GOOG) have entered the realm of Internet radio? I don't believe that it can.

Investors realize that Pandora is now in a highly competitive landscape and trades in a market that is anything but forgiving. As exciting as Pandora's IPO might have been, the Street seems equally eager to move on to the next great idea. I still like Pandora, though. But I wouldn't dare touch it today with my own money.

No Group Hugs for Groupon

It doesn't bode well for morale when your leader was voted as the worst CEO of 2012. But Groupon ( GRPN) made certain that it wouldn't retain that title by ousting its founder, Andrew Mason, two months later.

While I've always liked Groupon's concept, I've never bought into the idea that the company could make any money. But the IPO market loved the deal.

As with Pandora, Groupon shares soared on its first day of trading. On Nov. 4, 2011, the stock opened at $20 and reached a high of $31.14 and ended the day closing respectably at $26.11. Unlike Pandora, Groupon investors didn't wait long to panic. The stock quickly dropped to the low teens, reaching $14.85 only a few weeks later. Investors arrived at that "ah-ha" moment and caught on to my biggest source of concern.

The company lacks two of the most important things that I look for in an investment. It has no leverage and lacks the ability to create new markets. It can only operate in and service existing markets, which makes it vulnerable to macro weakness regardless of how small or temporary that weakness may be.

The Street caught on and realized the company's chance of earning a profit diminishes with more competition. Remarkably, the company has done a pretty decent job recovering from its lows and has strung together two consecutive good quarters with the help of improved international performance and mobile traction. But Groupon is still struggling with leverage.

With more prominent names like Google, Amazon ( AMZN) and Yahoo! ( YHOO) circling the waters, investors have begun to realize that Groupon can be killed off at any time. The fact is, it would cost Google or Facebook nothing (relatively speaking) to build what Groupon has.

I believe that the only reason Groupon still exist today is because management has not proven it can make any real money that would attract interest from rivals. With the company's market cap sitting at just $4.6 billion today, I still marvel at the fact that Andre Mason turned down a $6 billion acquisition offer from Google. Well, I suppose CEOs don't win dubious awards for doing a great job.

Connecting With LinkedIn

Last but certainly not least, there's LinkedIn ( LNKD), a company that allows its users to connect with other professionals whether within their industry or outside. With versions of the site existing in over a dozen different languages and with more than half of it users located outside of the U.S., LinkedIn has become one of the most highly visited online destinations.

The company has now reached "powerhouse" status in social media. But it certainly didn't start off that way. On May 19, 2011, LinkedIn began its first day of trading opening at $45 per share. The stock quickly shot up to $122.70 and then closed at $94.25. Volatility was sensed on the first day and this has made a lasting imprint on the company.

Investors were uncertain then as to whether LinkedIn was a fundamentally sound business. Even today the tug of war continues -- many are still unable to make up their minds about what valuation the company deserves. But the company continues to do its best to kill the stigma associated with social networking IPOs and the idea that they can't make money.

In 2010, prior to the company's IPO, LinkedIn generated full-year revenue of $243 million, with earnings before interest, tax, depreciation and amortization of $48 million. In 2011, the company posted revenue of $522 million, which represented year-over-year growth of 115%, while Ebitda soared 105%.

In 2012, revenue jumped more than 80%, reaching $972 million. Essentially, LinkedIn has more than tripled its revenue in just two years, while growing Ebitda at almost five times. Since its IPO the networking portal has consistently beaten analysts' high expectations, helped by the brilliance of its multiple revenue streams.

It seems, though, that LinkedIn's strong quarterly performances only causes the bar to be raised higher. There are many who believe that eventually the rug will be pulled out from under the company. But I'm not in that camp. We can debate LinkedIn's valuation and the merit of its high P/E, but unlike Groupon and Pandora, which have begun to be squeezed by rivals, LinkedIn continues to demonstrate lasting potential and its numbers continue a trend of profitability.

The IPO Addiction

The reality is, many of the recent IPOs, including the companies mentioned in this article, weren't profitable when they went public. Since then, they've followed a very predictable pattern: Big banks hop on-board and initiate coverage, there's a decent rise in the IPO price, earnings expectations fall short, the stock stagnates and begins to slide as IPO buyers cash out, new investors caught holding the bag blame Wall Street. Wash, rinse, repeat.

I am a skeptic by nature. Sometimes investors are quick to confuse a great idea with a great business. In that regard, investors lose perspective when it comes to these perceived "sure things" in the IPO market.

But let's not confuse due diligence with hype. In looking back at the performance of these three companies, if you had to do it all over again, would you still have made the investment?

At the time of publication the author had a position in AAPL.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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