Did Groupon and Zynga Just Call a Market Top?

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Soon-to-be IPO sensations Groupon and Zynga have plenty in common. They're capital-light, socially aware businesses with rich balance sheets and huge valuations. We (raises hand) talk about them as if they're the Next Big Thing in IPO stocks. But after having read the S-1 filings for both companies, I'm forced to wonder whether these offerings are just more evidence of a social- media bubble destined to pop.

IPO as PR event
Of the two, Zynga's S-1 has more of a dot-com feel to it. Here's a closer look at management's rationale for the IPO, which you'll find on page 36:

"The principal purposes of this offering are to increase our capitalization and financial flexibility, increase our visibility in the marketplace, and create a public market for our Class A common stock." [Emphasis added.]

In other words, the IPO is a PR event for Zynga -- bought and paid for by common investors. How's that for use of shareholder capital? Concerns about the company's business practices appear to be well founded.

Yet I'm torn. The very nature of social games means the experience can be different for every single player. Mix in peer pressure and a dash of competitive testosterone, and you have a formula for keeping gamers engaged in ways I haven't seen from Activision Blizzard (Nasdaq: ATVI  ) , Electronic Arts (Nasdaq: ERTS  ) , or Take-Two Interactive (Nasdaq: TTWO  ) .

The because-we-can IPO
Groupon has a different problem. The group-buying specialist doesn't know what to do with the cash it already has.  Here's a closer look at its disclosure, also from page 36 of its prospectus:

"Based on our current cash and cash equivalents, together with cash generated from operations, we do not expect that we will utilize any of the net proceeds to us of this offering to fund operations during the next twelve months. … Pending use of the net proceeds [for acquisitions of business or technology], we intend to invest the net proceeds in money market funds and investment grade debt securities." [Emphasis added.]

Is this a joke? Groupon intends to be the next Apple! The next Microsoft! In, um, how it invests excess cash in really low- return instruments. You wonder whether management thought no one would read the S-1.

Have we reached a market top?
Any reasonable investor scanning the headlines has good reason to be scared. Not only has Mr. Market made a habit of IPO busting, but Congress is also playing chicken with the debt ceiling. Uncle Sam and Mr. Market have rarely looked so frail.

Groupon and Zynga seem to know it, too. Management's disclosures bespeak of a let's-cash-in-while-we-still-can mentality that's all too familiar to those of us who started investing during the dot-com boom and bust. (Raises hand again.) I hope I'm wrong, but I don't think I am.

What's your take? Please vote in the poll below, and then leave a comment to tell us what you think about the current state of the IPO market. You can also add the stock to your watchlist for up-to-date analysis as soon as it's published.

Fool contributorTim Beyers is a member of theMotley Fool Rule Breakers stock-picking team. He owned shares of Apple at the time of publication. Check out Tim'sportfolio holdings andFoolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insightsdelivered directly to your RSS reader.

The Motley Fool owns shares of Microsoft, Take-Two Interactive Software, Apple, and Activision Blizzard. The Fool has also opened a short position on Activision Blizzard.Motley Fool newsletter services have recommended buying shares of Apple, Activision Blizzard, Take-Two Interactive Software, and Microsoft, creating a synthetic long position in Activision Blizzard, creating a diagonal call position in Microsoft, and creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.

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