Is it Worth it to Invest in Web 2.0 Stocks?

Finance.Yahoo.com released an excellent article yesterday on the falling IPO status of Groupon and perhaps further decline of the company, rather fast. I hope you get the chance to read this article because it is a very important one about unproven and new sectors in the web 2.0 craze. Sure, Groupon could have emerged to be the next unknown necessary technology (similar to Google) or it could amount to a total flop like in which there is little money to be made similar to Pandora.

Web 2.0 is upon us and these internet stocks are starting to emerge more and more again. What are their values and how do we assess what we are willing to pay for these stocks? The article mentions that Groupon was valued at $25 billion initially in June. However a new evaluation puts their coming IPO at $10-11 billion. This is due to a number of reasons such as copycats but most importantly, it is not making money.  Never mind the disgruntled costumers in a fad market or retailers no longer interested in losing money or costumers.

Aside from the questionable accounting practices brought up by the SEC Groupon is not making money as it should. Of its 115 million subscribers only 23 million of them are buying vouchers actively participating in its program. This may seem like a large number, but when the initial number was the former and the profits were realized in the latter there were quite a few disgruntled investors. A common problem of these web 2.0 companies is numbers. Investors assume that because a company has access to millions of people that they will be profitable. This is not always the case.

It’s hard for me to understand investing in a lot of these web 2.0 companies because most of them are based on the same easy to access premise, traffic. I understand the power of traffic but the mechanisms are in place for anyone to set up traffic. That is not to say that generating traffic is easy, but to value a company at even $10 billion like Groupon is absurd. What I need as an investor is something revolutionary to put my money in. In all fairness Groupon and its cousins Zillow, Pandora, Tudou.com, Linkedin, et al. could have been conjured up and financed by the likes of Google, Apple, Amazon, or eBay. These newly emerging companies all have fantastic ideas with great traffic but that might be it.  As a potential investor you will want more!

Investing in web 2.0 is somewhat of a gamble. I would love to get some of my money in Twitter or Facebook before they go public and will continue to research investing in more web start-ups before they emerge as the next hottest thing. Sadly though, I will not be investing in these companies because I believe in their inherent value or concept, but because so many others are putting their faith and money in them, bidding the price up.  If I find the rare opportunity to have access to something I know will be bought by one of the perennial powerhouses I will pounce on it!

Web 2.0 companies and their hot IPO’s are fine to invest in, but as soon as they hit big, cash in and walk away. Hold on though if you see something revolutionary like Google, Apple, Amazon, or eBay emerge.  And remember acquisition possibilities, but not at a discount of the stock price.

Ask yourself these 5 questions:

1. Could one of these perennial powerhouses construct something similar or better?

2. Does this new web 2.0 company have an original idea in an untapped market? If so, will it last or easily invite competitors?

3. How do they make money, is it one dimensional or do they have a stream of revenue?

4. Is it too limited to the presence of just one website or do they also exist in the real world?

5. And finally is their idea not forward thinking enough such that the technology will over run it within just a few short years?

 

Tagged Amazon, Apple, eBay, Facebook, Google, Groupon, IPO, Linkedin, Pandora, Tudou.com, Twitter, Web 2.0, Zillow