2 Recent Internet IPOs Still Presenting Value

Twitter (NYSE: TWTR  ) is the quintessential example of investors willing to pay for growth. While some investors are willing to take lavish bets on the hope that such companies can maintain growth, there are other opportunities such as Zulily (NASDAQ: ZU  ) or Care.com (NYSE: CRCM  ) that might provide a much better balance for future gains.

Impressive growth with an expensive price
Due to the extravagant post-IPO performance of Internet-based companies like Facebook, LinkedIn, Yelp, Zillow, and others, investors have had to pay to own a piece of newer public companies like Twitter.

With that said, Twitter's valuation is on a whole new level compared to its industry peers, trading at an unprecedented 46 times sales. If we look ahead to the company's revenue expectations for 2014 of $1.23 billion, growth of 85%, then Twitter is trading at nearly 25 times future sales.

Furthermore, Twitter has reached a point in its business cycle where user growth – the ultimate measure of future monetization for social media companies – is slowing. Twitter ended 2013 with 241 million monthly active users (MAUs), and although impressive, it showed a quarter-over-quarter gain of only 4%.

In addition, the company's Timeline views fell 7% compared to the prior quarter, and over the last year, its operating margin was a dismal negative 95%; last year was its best yet in terms of operating margin. Therefore, despite these obvious problems, investors are still willing to pay a price that implies huge expectations, and are doing so for a platform that appears to be losing user appeal.

Thus, for investors looking to capitalize on the growth of this space, and want to own a piece of a recent IPO, then there are better options that Twitter.

Just as impressive growth at a fraction the cost
One of those options are Zulily, which is a social-media like e-commerce company of sorts. It buys new and unique products in bulk, including items on sale that are then sold to customers in bulk, which is where the social media tell-a-friend aspect comes into play.

With that said, Zulily has created a very loyal customer base, specifically with women, and has grown from annual revenue of $18 million in 2010 to $695.7 million in 2013. Also, Zulily grew 110% year-over-year in 2013, and unlike Twitter, is profitable with full-year net income of $12.9 million.

Moreover, its customer-base grew 100% to 3.2 million in the fourth quarter, and what's encouraging is that Zulily expects its rapid growth to continue. Specifically, the company is guiding for revenue of $1.15 billion for 2014, and if we look at this from a valuation perspective, the stock is trading at just 4.5 times forward sales. Clearly, much better than Twitter and with just as impressive growth.

Great value following a breakout year
Care.com is an under-the-radar Internet-based company, and a much smaller one with a market cap of only $670 million. Yet, it really faces no competition and provides a much needed service to its users.

Care.com is a marketplace divided by families and caregivers, who pay a monthly fee to use the marketplace to connect. The families search their local areas for nannies, child care, senior care, pet care, special needs, and even tutoring; those providing the service are caregivers. According to Care.com's S-1 filing it has 9.7 million members with a near 50/50 balance, and is located in 16 countries.

With that said, Care.com has grown from $13 million in revenue during 2010 to $74.9 in the 12 months prior to September 2013. In the first nine months of 2013 the company posted growth of 81%, and is expected to produce growth in excess of 60% in 2014. In addition, Care.com is not spending aggressively to create growth, as its sales and marketing expenses increased only 23.5% in the first nine months of 2013, meaning its word-of-mouth approach is working effectively.

So, with growth of more than 80%, and 2013 considered its breakout year, Care.com is trading at about 8.9 times last year's sales. Like Zulily, Care.com has the growth of Twitter, far greater efficiency, but can be purchased for a fraction the cost.

Final thoughts
While Zulily and Care.com clearly look to be far superior investments to Twitter from a point of growth, profitability, and valuation, one of the two is obviously better than the other.

Zulily trading at 4.5 times forward sales is unprecedented, something we don't see from Internet-based companies with explosive growth, and that includes Care.com. Zulily's valuation relative to growth makes it a clear winner as one of the best values in this space. Then, when you incorporate its user growth and its profitability, it undoubtedly proves that from an upside perspective, Zulily has the potential to soar higher with very little downside risk.

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