My internet guru advises me that the public– namely Aunt Sadie, orphans and widows, dentists, and doctors, lawyers and other individual investors– have no business buying tech IPOs like Face book, Zynga, Groupon,etc. because the dice are loaded for the selling investors– not the buying investors. "You have to buy before they go public," my expert observer of gthe private/public markets advises. Be forewarned.
That's because high tech IPOs are just for insiders– the original venture firms and hedge funds– to get out of their positions, to exit their investments. Thus, a high tech IPO is not an example of an efficient marketplace. The only efficient marketplace for high tech is to avoid a single stock and try to find an ETF or a mutual fund that has a diversified number tech stocks with a marketplace record; like ETFs and funds with positions in Apple and Amazon, companies with some maturity.
My internet guru tells me " I don't trust the public market. There are very few stocks whose share price truly reflects their numbers. Their price action is the result of actions taken by their " insiders"– the management, private investor groups, who dominate the IPO and
subsequent price action in the stocks."
To prove his point my internet guru sent me a blog from Business Insider describing how venture capital firms spot the potential high flyers and demand a special class of preferred stock that assures repayment– so that said VC will pay more for a smaller % of stock at a higher valuation. It's the higher price than normal for a smaller interest that gives":the startups much higher valuations," says Business Insider. "Combined with a decline in yield for corporate debt, that makes venture capital a more attractive sector for large pension funds and other institutional investors.... This, in turn, makes the competition for the few high-profile, hyped startups that much more frothy." Look out for frothy.
Another investment adviser tells me he watches the action even in seasoned stocks like IBM and reckons the intra-day movements– like moderate waves in the ocean rolling up and down– reflect the buying and selling patterns of computer driven orders– that the daily highs and lows are the result of HFT– high frequency trading in and out of the market to make fractions of a point– possibly several times a day.
Facebook is the classic example of how the individual investor can get screwed, blued and tattooed. Facebook came at $38.00 a share in May– and closed closed at $18.06 on Friday– on its way to $15 or lower– on the remarkably damning revelation that the company is expecting to have $1 billion less revenues than were expected. Growth in Facebook revenues is FLAT, they tell us now.
Facebook has become a darling vehicle for the trial lawyers to whack away at the insiders, at Zuckerberg and his cronies, at Morgan Stanley and the other underwriters on Wall Street– and most of all the the venture angels like Accel in Silicon Valley and Facebook director Peter Thiels who got in on the cheap– and got out at the absolute top of wherever Facebook will sell ever. You heard it here first.
Still, I am informed by a more knowledgeable technology reporter that less highly promoted IPOs like Proofpoint, Infoblox, Splunk and Jive are holding their own around their IPO price. Forbes must be fair and accurate.
By comparison, the modest,un-hyped IPO for Carlyle Corp., came at $21 and has moved nicely up to $26.22– for a gain of just under 25%. Carlyle, facing a climate of bearishness about the future of private equity, did it just right. Nobel prize for Rubinstein et al.
So beware the next avalanche of tech IPOs that are going to be marketed in a manner not conducive for public appetite. Give them a wide berth until they prove they are going to produce continued real growth– not FLAT growth.