4 Web 2.0 Stocks Below Their IPO Price

By Trey Thoelcke Updated Jan 13, 5:31PM EST · Published Nov 5, 10:20AM EST

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4 Web 2.0 Stocks Below Their IPO Price — © Thinkstock

Groupon Inc.’s (NASDAQ: GRPN) terrible rout Wednesday has investors worried about other Web 2.0 companies in dire straits. Groupon shares were down over 26%, with extremely heavy volume, on disappointing earnings. Revenue missed expectations by only 3%, but that alone does not warrant a 26% crash. It was fourth-quarter EBITDA guidance that caused such a reaction, as it missed Wall Street estimates by 50%.

This was especially disappointing because Groupon has specifically had serious problems with taxes, paying as much or more in taxes than its entire annual revenues in its beginning years. The fact that earnings before taxes were so disappointing was a big reason for the huge sell-off. It revealed that the problems facing Groupon are systemic rather than simple bookkeeping. Selling coupons and deals online just isn’t cutting the mustard these days.

Groupon shares are now at only 10% of their initial public offering (IPO) price of $28. Traders may have overreacted a bit here, and we could see a bounce into the end of the year as lowered expectations settle in. Groupon though is not the only Web 2.0 company trading below its IPO. Here are three more.

Pandora

Back in June, we had said that Pandora Media Inc. (NYSE: P) had two choices on how to move forward, considering that the company could not seem to pull a profit. Either it could try to run more efficiently and reduce staff, or it could go all out and try to increase its user base so as to portray itself as an attractive acquisition for some other company that could better monetize it.

It seems they have done neither, as Pandora’s user base is down last quarter year over year and administrative expenses are higher. Pandora may still choose one of these two directions yet, but it will have to be soon before investors start losing any hope that the company will ever make money. Given that, it is not surprising that Pandora is now trading at only 59% of its IPO price.

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Zynga

Zynga Inc. (NASDAQ: ZNGA) is trading at less than a quarter of its IPO. It also missed estimates, though not as badly as Groupon did. Zynga was finally net positive this quarter, but only because of a tax benefit. Operating profit was still negative.

The problem with Zynga is that there is very little brand loyalty with mobile gaming. Gamers don’t particularly care who publishes a game as long as it’s good, and there is much less capital involved in mobile gaming than there is in console gaming. Console gaming also generates much more brand loyalty. That means any big name can compete, making the environment very tough, especially with Facebook about to shut down unwanted game invitations. Zynga shares did not react much to the earnings miss, but there seems to be little possibility of real growth here.

King Digital

King Digital Entertainment PLC (NYSE: KING) is the success story, but still a sad one. After Activision Bilzzard made a $5.9 billion offer Wednesday, shares soared 14% to a market cap of $5.6 billion. As nice as that move is, shares are still trading 13% below their IPO price. King is actually somewhat successful at mobile gaming and has no debt on its balance sheet, which does make it a decent buyout target for a bigger company, considering lackluster investor enthusiasm for the sector. So Activision took advantage of the discount and made its offer. Even so, King is worth less now than it was when it first became public.

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About the Author Trey Thoelcke →

Trey has been an editor and author at 24/7 Wall St. for more than a decade, where he has published thousands of articles analyzing corporate earnings, dividend stocks, short interest, insider buying, private equity, and market trends. His comprehensive coverage spans the full spectrum of financial markets, from blue-chip stalwarts to emerging growth companies.

Beyond 24/7 Wall St., Trey has created and edited financial content for Benzinga and AOL's BloggingStocks, contributing additional hundreds of articles to the investment community. He previously oversaw the 24/7 Climate Insights site, managing editorial operations and content strategy, and currently oversees and creates content for My Investing News.

Trey's editorial expertise extends across multiple publishing environments. He served as production editor at Dearborn Financial Publishing and development editor at Kaplan, where he helped shape financial education materials. Earlier in his career, he worked as a writer-producer at SVE. His freelance editing portfolio includes work for prestigious clients such as Sage Publications, Rand McNally, the Institute for Supply Management, the American Library Association, Eggplant Literary Productions, and Spiegel.

Outside of financial journalism, Trey writes fiction and has been an active member of the writing community for years, overseeing a long-running critique group and moderating workshop sessions at regional conventions. He lives with his family in an old house in the Midwest.