Why Internet IPOs Like Zynga Inc. (ZNGA) & Groupon Inc (GRPN) Are Failing

The New York Times recently blamed the weak IPO performance of these “superstar” internet companies on late-stage investments combined with the increased transparency regarding private company valuations thanks to new markets like Secondmarket, but the reality is more ironic:

The same viral and efficiency-inducing nature of the internet that has propelled these companies businesses’ is the cause their IPOs have basically bombed.

Sure, sure, Secondmarket, which allows investors to get a sense of what accredited investors are willing to pay in terms of valuation for private companies, hurts their IPO performance because those who REALLY want in can now purchase shares before the IPO.

And yes, late stage investments definitely dilute valuations and give early investors/insiders an easier and faster way out.

But the main reason these once thought “gimmes” are crashing — Groupon dropped 50% from its IPO highs, which itself was disappointing and Zynga’s IPO couldn’t even price above its expected range (pathetic for a company previously considered “hot”) not to mention that it finished down on its 1st day of trading from its pricing at $10/share and now sits in the $8s, looking like it too could drop 50% over the next few weeks — is because social media is both these companies’ gift and curse as the words of naysayers are now EVERYWHERE, and these negative stories spread far faster than anything positive.

Trust me, as a blogger focused on short selling, I know these things.

After all, stocks crash far quicker than it takes them to rise and fear spreads faster than positivity…especially in this dangerous market where the credibility of blue chips like Bank of America Corp (BAC) and entire countries like Italy and France are questioned daily.

Did Groupon and Zynga really think their eccentric management, iffy accounting and sketchy/ponzi-scheme-like viral growth would not be questioned?

Yup, I think that while they’re both proven leaders in their shady industries, they both underestimated just how many public inquisitors there would be and how fast that information would spread.

But the truth is that neither company has any choice but to accept these lower valuations and IPO because while they’re both growing fast, neither makes much money and their business models are VERY far from proven. They’ve rejected buyouts due to their ambition so they IPOed to get the $ before more negative information went viral.

After all, once you go viral, you can never go back, it’s only going to mount.

And as that negativity mounts, competitors with cooler and newer products can overtake you and then your most precious assets — revenue growth — is gone too so you won’t even be able to raise any money to compete.

As evidenced by Groupon’s SEC filing woes and Zynga’s management insistence that it’s all about the product, I’d say that despite the tens and hundreds of millions of dollars, and in some cases, billions, created for the top employees at each company, they understand their difficult predicament and so they’re going to battle as much as they can.

And that’s what the stock market is: a battle of companies trying to outwit their competition and dress up their businesses to make it look healthy and eternal for investors…investors have the choice to believe the BS or to cut through it.

Market historians know that despite bull markets, 70% of stocks drop each year — it’s in some book somewhere, go Google it — as public companies are the most desperate in the world and that entertainment outlets like CNBC and brokers and financial advisors of all shapes and sizes hide this fact as much as possible, preying on the naive to make them believe the stock market is an amazing opportunity.

Well, thanks to the social web, marketing lies are fast becoming obsolete and it’s not only bringing down IPOs that should have popped 200%, 300% or even 500% on the 1st day of trading back to reality, it’s also executing tyrants around the world…literally.

Oh yes, beware the social web and its implications: if you are profiting from lies and trying to hide the truth, you will eventually be discovered and outted.

Oh yes, I’m talking about penny stock promoters, your days of lying will soon be at an end as new projects and statistical information will help crush your deceits.

Obviously there will always be a few suckers, but the big business is in being honest…the inspiration to be fully honest and transparent has never been greater so if you’re a thief, the time to switch over is now…websites like Investimonials and Scambook (I’m founder and an investor, respectively) are the future.

And to those moronic short sellers who think that I’m hurting the availability of shares to short by my teaching information about how to short sell and which 6 brokers I use to short sell, think again…it’s always been difficult to short hard-to-borrow stocks, hence one of the biggest reasons why I became a teacher in the first place as I explained in this post.

The true beauty of the social web is that in all this destruction of lies and budding transparency, therein lies great opportunity.

For example, as I write this post, brokers around the world are figuring out ways to loan more stocks to allow for short selling…until my small influence, there was never this much demand for hard-to-borrow stocks and trust me I know because they’re coming to me to work on deals to get more shares out to the public who wants it…namely subscribers of my 4 newsletters.

Just because these internet IPOs are dropping nearly every day doesn’t mean there isn’t opportunity, the opportunity comes from short selling them when they break key support levels, just as I showed months ago when we NAILED the breakdown of Chinese Facebook wannabe Renren Inc (RENN) at $12, which is now trading in the $3s….watch the free video lesson

Internet Stock Go Plop
Internet Stock Go Plop

Contrary to the lies promoted by penny stock promoters, CNBC and their main hypocrite, the stock market isn’t full of opportunity for those who want to do simplistic research and invest in “solid companies”…that was so the 1990s pre-web, let alone pre-social web….remember Facebook was just invented a few years ago and it still has a ton of issues.

Experience, statistics and future academic studies show the greatest opportunity in the stock market exists for those willing to think outside the box and accept the stock market for the giant pump and dump scheme it is. ..accept that these internet IPOs suck, financially and business-wise and their stock prices finally reflect that sucking.

Accept short selling for the wondrous thing that it is, embrace the effects of transparency and the viral/efficiency nature of the social web and above all else, learn to profit from this new reality rather than being suckered by those who twist the truth for their own benefit, not yours.