First all, Happy New Year to all! This is the first post of 2012, and I want to give my 2 cents on why tech stock, especially new IPOs aren’t doing so hot.
Market not understanding value of tech?
This is a common excuse tech companies use to explain their lukewarm stock performance. Just look at Zynga (NASDAQ: ZNGA); their IPO was 100 million shares for $10 but the stock has been trading below the IPO price at around $9. Groupon’s IPO (NASDAQ: GRPN) was also fairly flat. Initially the stock was priced at $20 raising the company more than $700 million but the price is hovering around the IPO price. So why have these new IPOs not taken off like Google or Yahoo back in the days?
I think the problem is not that investors don’t understand tech companies, but simply that they do not trust them to be profitable in the long term. We look at the business model of Zynga – games are web-based, free to play, simplistic game-play, and lead-gen supported. The gamer doesn’t have to actually pay for the game unless they need special game currency to be more successful in the game. In this case, they can either take out a credit card, or fill in a bunch of offers from lead-gen sources to pay. The only innovation Zynga brings to the table is the idea of a social game where you can connect with your friends on Facebook. This does add major value to the game, but it is nothing new. In fact this has been done on consoles in years, Facebook is just a more convenient place than XBOX Live or PSN. Therefore, Zynga is surviving on a shoestring of an idea that is incomparable to the value that companies like Google, Apple and Microsoft brought to the market. How can investors get excited about Zynga?
I don’t think investors are not understanding tech, they have seen so much change in tech over the past 10 years. It is simply getting more difficult to wow them.
Uncertainties and risks in tech?
When Steve Jobs introduced the iPad, he said that if this new category of device – tablets cannot surpass the laptop and smartphone in common tasks then it has no reason for being. Often tech companies are driven by new technologies, instead of the value they actually bring to the consumers. Take a look at Palm, they used to run one of the best handheld businesses in the world. However, the technology was simply ahead of its time. Many companies can build a colour LCD screen device that you can hold in your hand, but without an affordable and speedy connection to the Internet it is no better than a dial-tone phone. Therefore, Palm faltered and others easily replaced it.
The thing is, investors want to invest in tech companies that cannot easily be replaced. They want to invest in companies that produce not only shiny new gadgets but gadgets that brings significant value that others cannot. This clause makes it even more difficult for companies like Zynga and Groupon to be successful today.
Zynga games runs on the Facebook platform, which is free and completely open to developers. Who is to say that while Farmville is a hot game this year, some independent developer can’t write another game that is even better? Look at how many other companies Groupon is competing with – Google Offers, LivingSocial, 1SaleAday and the list goes on.
Now we see the real problem here – these companies aren’t selling technologies, they are selling an idea; an idea that can easily be duplicated, replaced, and forgotten.
Profit, Profit, Profit
Obviously, profit is more important to investors than revenue, but what do you say to a company like Facebook that tells investors that its goal isn’t about profit? I say, that is because you guys haven’t figured out how to make profit! Needless to talk about growth and sustainability of profit.
Investors want to see tech companies become profitable, but they expect these companies to do more than just ad-supported pages.
What to expect in 2012?
I think 2012 is going to be another flat year for tech stocks. Like I mentioned before, it is increasingly difficult to get investors excited in tech, especially when most companies still resort to an ad-supported model to make money. Apple (NASDAQ:AAPL) will continue to do well, but I do not see many others that have the same potential.
I think Tesla (NASDAQ:TSLA) will see some green after the release of the much anticipated Model S sedan. Tesla is one of the few unprofitable companies selling an idea of what the product could be and still maintain its stock price. However, I think Model S is a healthy step for the company in 2012. I don’t dare to dream for Tesla to become profitable right away, but in 3 years I wouldn’t expect their stock price to be lower than $50. (Currently trading at $28.56)
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