Continuing with my roundabout discussion of the Facebook initial public offering (IPO), I'd like to go over some more recent tech IPO history this week. But first — and really, I hate to toot my own horn here — Apple shares broke $500 yesterday morning. Just saying. Back to IPOs.
The IPO landscape has drastically shifted over the past few months. Over the summer, public offerings sold like hotcakes as internet radio site Pandora and the business-focused social networking site LinkedIn made news with their extremely well-hyped offerings. Shares soared and everyone was happy.
And then there were whispers of the b-word. Whispers quickly turned to rumblings, and before you could say "downgrade," the market declared that we were in the midst of the dot-com bubble 2.0.
The bubble didn't exactly pop — deflated, sure, but nothing like the 1999 crash and burn.
Fast-forward to the current season and people are excited again. LinkedIn beat earnings last Friday, and a combination of pent-up investor demand and unknown growth prospects make Facebook sound awfully attractive.
But the big question remains: Can a free website still be profitable?
So far, most results point to no. Pandora went public at $16 in June, before the "bubble" existed. In a bizarre interview on the NYSE floor, CEO Joe Kennedy responded to the profitability question by saying, "We described the long-term opportunity grow our share, and we talked about the economic demands of the visit. We're not putting any time frame on it."
You read that correctly. The CEO of a company said on national television that his business is not profitable and that they have no idea how to fix that in the near future.
I was shocked. I would have dumped the stock in an instant. And then I watched, with even greater disbelief, as Pandora shares shot up 50 percent as the interview continued. Shares have since fallen off a cliff, and currently sit a few dollars below the initial price.
LinkedIn, which priced at $45 over the summer, climbed to over $110 in its first few months before hovering around its current level of $90.
LinkedIn is, in my opinion, the only social networking site to have successfully monetized its business. LinkedIn reported 131 million users in November of last year, and its advertising, or "Market Solutions," revenue accounted for a modest $49.5 million. Most of its profit, however, comes from what it calls "Hiring Solutions," a service that matches employers to applicants. The Street responded positively to the shift away from advertising, as shares jumped nearly 20 percent.
Deal site Groupon, which priced at $20 in November, drew speculation from many, with one analyst likening its business model to a Ponzi scheme. Groupon disappointed with a loss in the fourth quarter and now sits a few cents above its initial price.
Twitter — which is still privately owned and has no plans to go public for now — has only just started figuring how to actually make a profit from its rapid growth. Facebook manages to squeeze out about $1.20 in profit per user, using advertising as its main source of revenue.
Facebook has been the exception, though, not the rule. Advertising cannot be your only source of profit if your user base isn't as ridiculously huge as Facebook's. Even then, Facebook's ads don't always yield profit for the buyers of ad space. One Bloomberg reporter received one click for 7,000 ads purchased. Fortunately, Facebook ads cost fractions of a penny, so even then they still might be worth it to larger firms.
Moving forward, I'm sure Facebook will receive more than its fair share of love when it opens. Mark my words, shares will double the first day. But whether it can sustain growth — and profitability — will take much longer to tell.
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Walt Laws-MacDonald is a freshman who has not yet declared a major. He can be reached at Walt.Laws_MacDonald@tufts.edu.
