The 5 Most Overrated IPOs of 2011

It's the next big thing! It'll make you a millionaire! Talk about your high expectations. This year has certainly seen its fair share of hyped companies, both new and old. Some hype may be warranted, but it seems like quite a few companies have launched helium IPOs this year; they floated to the stratosphere before finally deflating.

While compiling a series on the year's best- and worst-performing IPOs, I saw a number of compelling stories that deserved to be told. Here are a few of them, representing my personal selection of 2011's most overrated newly public companies.

Proprietary methodology revealed
I looked for companies that seemed to have a major disconnect between their potential and their valuation, the latter being at least $500 million. Most of the more than 100 IPOs so far this year have slipped rather quietly under the radar. But the companies below, by and large, were anything but quiet, and most pumped in more helium by restricting the size of their initial offers.

Company

Market Cap

Recent Price

Change from First-Day Closing Price*

What's the Hype?

LinkedIn (NYSE: LNKD  ) $6.15 billion $63.08 (33.1%) Find a job! Recruit for your company! Social media, baby!
Pandora Media (NYSE: P  ) $1.74 billion $10.78 (38.1%) Internet radio! Personalized music stations!
Dunkin' Brands (Nasdaq: DNKN  ) $2.96 billion $24.64 (11.5%) Donuts! Coffee! Ice cream! Breakfast!
Active Network (Nasdaq: ACTV  ) $708 million $13.04 (18%) Sign up for sports! Market your sports! Manage your sports! Sports on the Internet!
Groupon (Nasdaq: GRPN  ) $10.68 billion $16.75 (35.9%) It's stuff you probably don't need, but cheaper! Everybody likes cheap stuff!

Sources: IPO Scoop and Yahoo! Finance. *As of Nov. 25 close.

Bubble 2.0
LinkedIn's IPO benefited tremendously from pent-up demand for social media shares, which it fed by only offering an 8% stake to the public on its first day of trading. Even LinkedIn's employees agreed that it was too much when the $45 IPO price became $94.25. A secondary offering, combined with the end of LinkedIn's lockup period, has kept the company from climbing back toward triple digits -- not that it ever should, as I see it. The company's absurdly high 864 P/E also has a long way to fall before most investors would consider it fairly valued.

Lend me your ears and I'll sing you a song
Pandora's most obvious counterpart in the radio sphere is Sirius XM (Nasdaq: SIRI  ) , so it's only fair to compare the two, to see just how absurdly overhyped Pandora is.

 

Pandora

Sirius XM

Market Cap $1.74 billion $6.56 billion
P/E / Forward P/E NM / NM 43.8 / 21.9
Projected 1-Year / 5-Year Growth 50% / 40% 14.3% / 30%
Active Subscribers 36 million* 21.3 million
TTM Revenue $241 million $2,967 million
TTM Free Cash Flow ($9 million) $381 million

Sources: Yahoo! Finance, Morningstar, and news reports. The figures are as of Nov. 25. NM = not meaningful due to negative earnings. TTM = trailing 12 months. *Based on number of registered users who accessed the service on a monthly basis as of July 2011. Not all of Pandora's subscribers pay for access.

A subscriber means a lot less, value-wise, to Pandora than it does to Sirius XM. If these figures hold up, Pandora would need more than 500 million registered users accessing the site monthly to equal Sirius' revenue, to say nothing of its potential profits over the long run. With less than 10% of Pandora shares publicly traded, it's safe to say the company's early investors will be waiting a while before their investment gets back in the black -- if that ever happens.

Don't run on Dunkin'
One of these things is not like the others -- Dunkin' Brands is the lone company on this list without a tech connection. It's tough to even call it "overrated," as Dunkin's been around for decades, but its recent private-equity-driven IPO was popular enough to earn the company a 41 P/E, well greater than that of coffee competitor Starbucks' (Nasdaq: SBUX  ) P/E of 25.

The difference might lie in its perceived expansion potential. Dunkin' dominates the Northeast but hasn't achieved ubiquity elsewhere. However, the company's had longer than Starbucks to stake its claim to the West Coast, and its IPO proceeds are mostly earmarked to pay down debt -- essentially giving its private-equity owners a big payday. Shareholders expecting a Dunkin'-fueled portfolio jolt might find the reality a bit bitter.

Don't just be active, be proactive
Longtime Fool contributor Rick Munarriz told us to toss Active Network out soon after its public debut, citing competitive headwinds, poor financial performance, and slowing growth as good reasons to avoid the online event organization and promotion hub. The market's taken his advice, and there are reasons to worry about this company's long-term potential. There are several excellent online alternatives for event management, including Meetup.com, Evite.com, and Facebook, which could become one of 2012's most overrated IPOs. They may not currently have the same functionality as Active Networks, but creating that functionality is only a few great programmers away.

It's still overrated, even at half-price
Ah, Groupon. Where do I even start? Some have called it the fastest-growing company in history, with only moderate hyperbole. Google offered to buy it out for $6 billion, but Groupon's leaders had bigger plans. They wanted to go public at a $30 billion valuation, valuing them more dearly than most major retailers. Thanks to some clever accounting tricks and tremendous hype, Groupon was the talk of the financial press for months… until the bad news started leaking out.

Somehow, the daily deals company's still worth $10 billion. But competition from LivingSocial -- which may be headed toward its own IPO -- and other players is a constant threat. Keep in mind that Amazon.com, when it went public, had a market cap of $438 million. By my calculations, if Groupon's first shareholders are hoping for the next Amazon, they'll need its market cap to reach $1.89 trillion. I don't see that happening.

Stay tuned tomorrow for five IPOs from the past year to watch in 2012. To find out about one tech stock that's anything but overrated, get your copy of the Motley Fool's free report on the next trillion-dollar technology revolution while it's still available.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter for more news and insights. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Active Network, Amazon.com, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 30, 2011, at 12:35 PM, Mega wrote:

    ZIP, Z, AWAY, DMD, ANGI, QIHU, TUDO, TAOM, and RENN also deserve credit as major dogs. All of which deserved their terrible performance.

  • Report this Comment On November 30, 2011, at 12:37 PM, Mega wrote:

    And most of those deserve to fall even further.

  • Report this Comment On November 30, 2011, at 12:39 PM, Mega wrote:

    "With less than 10% of Pandora shares publicly traded, it's safe to say the company's early investors will be waiting a while before their investment gets back in the black -- if that ever happens."

    This is incorrect. Their early (venture capital) investors are firmly in the black.

  • Report this Comment On November 30, 2011, at 12:47 PM, TMFBiggles wrote:

    @ Megashort -

    That could have been clarified better to read "early post-IPO investors", or a similar phrasing. My apologies. None of these were meant to reference pre-IPO venture capital or other pre-IPO investments.

    Also, DMD, QIHU, and RENN are all in the "Worst IPOs of 2011", since they had the worst performance to date.

    Thanks for reading!

    -Alex

  • Report this Comment On November 30, 2011, at 4:43 PM, fun2bretired wrote:

    Yep Renren, but look at STV as well. It's also a dog.

  • Report this Comment On December 01, 2011, at 1:42 AM, lanceim59 wrote:

    How's about a list of the most underrated IPOs of 2011?

    My list would include:

    1. Solazyme (SZYM)

    2. Velti Pic (VELT)

    3. Pacira Pharmacuticals (PCRX)

    Anyone have anymore IPOs?

  • Report this Comment On December 01, 2011, at 7:33 AM, WeWereWallStreet wrote:

    What a great article! Nail! Head! Hit!

    We think coffee and donuts is a pretty steady business so might not have that one on our list, but the other four? Especially LinkedIn and Groupon -- losers.

    LinkedIn insiders are dumping shares already and you just know the Groupon guys have one eye on the door already. How many MSFT shares did Bill Gates sell first chance he got? Exactly.

    www.WeWereWallStreet.com

  • Report this Comment On December 01, 2011, at 11:59 AM, bretthorn wrote:

    I'm not sure Starbucks is the best company to which to compare Dunkin' Brands. Starbucks restaurants are mostly company owned (except for those licensed to operators in airports etc., and overseas operations) and both Dunkin' Donuts and Baskin Robbins are franchised. It's a different business model. Subway actually might be a closer comparison.

  • Report this Comment On December 04, 2011, at 7:56 PM, TMFBiggles wrote:

    @ bretthorn -

    You make a good point.

    I chose Starbucks as a reference because Dunkin' stores are reported to make a large amount of their revenue from coffee sales rather than donuts and sandwiches. This is a point brought up by several financial sites, and seemed more apt than a straight franchised-model vs. franchised-model comparison, since neither Starbucks nor Caribou Coffee are franchise operations.

    From what I can tell, Subway is privately-held, making any comparison much more difficult.

    - Alex

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