Social network stocks are getting the antisocial treatment from tech investors. What was once the "next hot thing" is cooling off, and traders and early investors are heading en masse for the nearest exit.
Let's take a look at what has prompted the investment community to excommunicate Facebook, Groupon, and Zynga from their good graces.
We all know the story by now: Facebook's IPO was the most-hyped stock since Google, a decade earlier. And the roadshow had more pomp and circumstance than Queen Elizabeth's Jubilee.
But Facebook was oversubscribed, overpriced, and overpromised, leaving it no room but to disappoint. There was massive insider selling and disgruntled public buying in a chaotic market environment that spurred more lawsuits than the tobacco industry (well... maybe).
Facebook shares have lost over 50 percent of their value, hitting a new low of $18.75 on Monday, August 20. But the public fallout began back on August 2, when Fidelity Investments announced that 16 of its 21 funds involved in Facebook were paring back their holdings.
Other top insider investors that have sold Facebook shares are early investor and board director Peter Thiel (who had sold 20.1 million shares as of today); Accel Partners (which sold 57.7 million shares); DST Global (45.7 million shares); Goldman Sachs (24.3 million shares); and the list goes on. In total, 241 million shares have been sold for a whopping $9.8 billion.
The bloodletting is sure to continue, as another 1.6 billion shares will come to market through November. And analysts are still skeptical that Facebook can monetize the mobile market, which brings into question whether the company's valuation is still too high.
According to a recent Wall Street Journal report, Silicon Valley angel investor extraordinaire Marc Andreessen recently joined other prominent investors in unloading a large portion of their holdings in the troubled dealmaker's stock.
The investors have flat left Groupon for a number of reasons. First, the stock has run into a flood of copycats, including Google Offers, TravelZoo, DealOn, and Living Social. Second, the share price got slammed on an earnings miss for the second quarter, losing over 27 percent of its value. Third, analysts still have some trepidation about Groupon's accounting practices, which were deemed not transparent enough earlier this year. Also, Groupon's sales force is reportedly fleeing to other firms.
Its one thing when insiders bail on a new issue, but when the CEO does, it's time to take cover. And that's what's happened at Zynga, where founder Mark Pincus has been accused of insider trading after selling shares in a secondary market offering in April. The secondary offering was priced around $12 a share when Pincus and other investors sold a chunk of their stake. Pincus was reported to have made $516 million. Shares now trade at around $3 a share.
Zygna is also currently being sued by Electronic Arts, claiming Zygna's game, The Ville, is a ripoff of EA's The Sims Social. Zynga also posted a miserable quarterly loss of $22.8 million. And Zynga was sued recently by an investor who alleges that shareholders were misled about the company's financial strength.
It is safe to say the honeymoon is over between investors and some of the more highly touted social IPOs. Still, while insiders still seem to make money and get out at the right time, the game continues to be heavily stacked against retail investors and general shareholders.
— Chris Poley has been a professional trader for more than 20 years.