Social Networking Sites have Uncertain Profit Potential

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Are We in the Middle of a New Tech Bubble?

When career-networking site LinkedIn Corp. (NYSE: LNKD) started its first day of trading May 19, its shares zoomed 109% from its initial public offering (IPO) price of $45 a share to close at $94.25, and reached a market value of $9 billion – fueling rumors that we’re in the middle of a new tech bubble.

Groupon Inc. filed for an IPO on June 2 and analysts said it could be valued as high as $30 billion, sparking more talk that sizzling tech IPOs are little more than a repeat of the dot-com bubble that burst in March 2000.

And many investors are eagerly awaiting another batch of Internet IPOs. Social networking sites Facebook Inc. and Twitter Inc. and gaming site Zynga Game Network Inc. are all thought to be hitting the market this year.

 

Some analysts say these companies have uncertain profit potential, and pouring money into them would be following the same tragic trajectory as the previous tech bubble. Investor interest piqued at any dotcom business and threw billions of dollars at companies. When returns didn’t live up to promises, most investors were left empty-handed.

“We have a lot of echoes of 1999,” Lee Simmons, an industry specialist at Hoover’s Inc., a company that tracks IPOs, told NPR. Simmons said he found it hard to believe LinkedIn could be worth $9 billion with 2010 profits of just $15.4 million.

Groupon’s recent losses also leave many analysts questioning its profitability. Groupon lost $413.4 million last year and another $113.9 million in 2011’s first quarter.

“It’s totally like 1999,” Sucharita Mulpuru, an online-commerce analyst for Forrester Research Inc. (Nasdaq: FORR), told The Wall Street Journal. “To lose this money? What’s crazy about these numbers is that this should be a highly profitable model.”

But some argue this time is different.

Money Morning Managing Editor Jason Simpkins last week told readers how too much has changed between the dotcom bubble and now for the situations to be seen as the same. Tech companies today benefit from the dramatically increased popularity of the Web, as two billion people regularly search the Internet. Companies that launch IPOs now also have better business models and proven earnings than the dotcoms in the 1990s.

“The companies going public now are fairly large companies, with real users, real customers, real revenues, multiple revenue sources,” venture capitalist Michael Aronson, who taught at the University of Pennsylvania’s Wharton School of Business during the last tech boom, told NPR.

 

Even if several of this year’s IPOs help investors win big, not all of them will be the next Google Inc. (Nasdaq: GOOG) or Amazon.com Inc. (Nasdaq: AMZN). Some analysts worry that investors’ pent-up demand for tech start-ups will cause them to put money in less profitable options.

“If you’re dying of thirst, you’ll accept iced tea even if you really want lemonade,” Max Wolff, senior analyst at GreenCrest Capital, told CNNMoney. “It’s a perfect storm of fury, frustration, excitement and delay.”

Original Article-MoneyMorning

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