Silicon Alley: Bubble? Ba-Zynga!

A year ago, the tech press was all aflutter about the possibility of a new bubble in the internet industry. The blogosphere hummed with dire predictions of "Dot Bomb 2.0" and equally passionate rebuttals. It's amazing how much can change in a year.

The most high profile example is Facebook. After years of speculation and hype, the darling of the social networking world finally went public in May this year. The initial public offering (IPO) of Facebook's shares raked in $16-billion of new capital for the company, making it the third largest IPO in US history. It set the company's total market value at over $104-billion (or nearly a trillion rand). Since then its share price been struggling. Currently it's worth around $18 per share – half its initial price.

But Facebook is hardly the only one feeling the pain. Zynga, a wildly profitable maker of online games, made a big splash with its own IPO in December 2011. The offering raised $1-billion from the markets and valued the company at $7-billion. Its shares are now worth around $2.80 each – close to a quarter of the IPO price of $10 per share.

The most painful example, though, is Groupon – an online "daily deals" service that went public in November 2011, raising $700-million. At the time this made it the biggest technology IPO since Google, and valued the company at nearly $13-billion. At its current share price the company is barely worth $2-billion. Ouch.

The only big internet IPO in recent history that hasn't ended in tears is LinkedIn – a social networking service for business people. Its shares are currently worth just over $107 – 15% more than its initial market price. But the road has hardly been smooth. LinkedIn's shares have plunged below $65 on three separate occasions.

Compared to Google – still the gold standard of the internet IPO – all of these stories sound like abject failures. Google stock has never traded below its IPO price of $85 and its shares are currently worth over $685 each. What's more, Google went public in 2004 when the wounds from the dotcom crash had barely healed. In the current climate its IPO would have been a feeding frenzy.

But all of these supposed failures are actually good news. They tell us that the internet has matured significantly as an industry, in part because investors understand a lot more about its capabilities and its limits. All of the companies listed above, including Google, have been punished by the markets for missing revenue or other targets. The main difference is that expectations of Google started out relatively low, and the company has consistently performed well above them.

It's tempting to write off the likes of Facebook and Zynga as overhyped and doomed, but to do so would be short-sighted. Both companies have hundreds of millions of users, many of whom pay them money directly, a previously unheard of phenomenon on the internet. Both companies have some of the most talented people in the industry working for them, and both have huge competitive advantages over their rivals. Neither of them has spent much of the cash they earned from their IPOs.

In fact, now might be a good time to invest in both of these companies. I would wait until mid-November to buy Facebook stock – since a large number of early shareholders currently "locked in" will be able to sell their shares then – but at that point the shares will probably be at around fair value. And Zynga, currently being punished for losing two high profile employees, is probably undervalued right now.

And let's not forget that none of these companies is even close to a decade old. The IPOs in question, however rocky, have made many of their founders into billionaires. Sure Mark Zuckerberg, the 28-year-old founder of Facebook, is now worth "only" $10-billion not $20-billion. Do you think he really cares?

Alistair Fairweather is the general manager of digital operations at the Mail & Guardian. He was also guilty of getting overexcited about the supposed tech bubble. Follow him on Twitter: @afairweather


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