in Mobile Gaming

#Facebook: IPO failure highlights valuation bubble

Facebook’s continued fall has put the social network on pace to be one of the worst large U.S. IPO starts in the past five years.

The social network’s much awaited offering was in the midst of its second-straight day of declines, dropping as low as $30.98 today. That would have been an 18.5% drop from its IPO of $38.  The stock has recovered somewhat, recently down 3% to $33. That also marks a 13% decline from its IPO price, equal to the worst three-day start for an IPO that raised over $1 billion since 2007, according to Dealogic.

There have been 23 U.S. IPOs over that size since 2007. Through the first three sessions, only asset-manager Och-Ziff Capital performed as poorly, losing 13% as well, according to Dealogic. In fact, only seven of the deals ended their first three sessions in the red, the data provider says.  Facebook would have to fall further to be worst first-week performer, given Och-Ziff ended its inaugural week down 24%. Overall the 23 IPOs averaged a 15.6% gain during their first week, according to Dealogic, meaning Facebook would have to hit $44 by Thursday’s close to catch them.  Among deals that raised over $500 million since 2007, Facebook would be on pace for the fourth-worst first week, behind Och-Ziff, Orbitz Worldwide and Clearwire. (Orbitz and Clearwire both lost 17%.)

 The Facebook-bubble is bursting

As with other bubbles — from tulips to dot-coms — the social-media boom was created by greed and inflated by fear.  The greed that started this bubble came from those in the private investment community who — by design, of course — are out to maximize profits. People invest money to make money, after all, so it’s no surprise that VC firms have rushed in to fund so many social-media start-ups.

The fear that inflated it emanated from professional money managers terrified of missing out on the “hot” IPOs of the past 12 months; that fear is ironic when you consider that these fund managers are, for the most part, playing with other people’s money — in millions of brokerage and retirement accounts — and thus have no real skin in the game. Now that the VC-fed bubble in social-media stocks has met the sharp anger of all those money managers counting up their Facebook losses, look for the public markets to start picking winners and losers in social media. The tide that has lifted all social-media boats is clearly ebbing.

Companies that can’t produce annual net income despite billions of dollars in annual sales — including Groupon and Zynga — are going to end up as also-rans or takeover fodder at valuations well below their current prices. But don’t grieve for their insiders, who cashed out big even before their disastrous IPOs. Read: Facebook, Zynga, Groupon minting billionaires.

At the same time, there’s a reasonable chance that Facebook and LinkedIn will survive as public companies — given that every new technology market produces two or three winners. (For example, think Intel and AMD in chips; Dell, H-P and Apple in personal computing; Oracle, IBM and Microsoft in enterprise software; or Google and in Internet services.)

But it will take both Facebook and LinkedIn a long time to grow into their current valuations.

 Based on Tuesday’s share price of around $34 a share, Facebook is trading at about 65 times expected 2012 earnings of 52 cents a share, according to the consensus earnings estimates compiled by Thomson.

LinkedIn is even pricier. At $96 a share, it’s trading at 143 times expected 2012 earnings of 67 cents a share.  Given that froth, even the best of the social-media stocks might have much farther to fall.

We are much more attracted to the mobile gaming sector, where money is made and growth prospects look rosy indeed. With a strong track record of profitable growth and a rock solid balance sheet, our top-pick remains G5 Entertainment. Its share is currently trading at below 12 times expected 2012 earnings (according to management guidance). For our full take on the case please check out:

Nordic Investor

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