Tech stocks have been the darlings of momentum investors this year. And this especially has been the case with some recent social IPOs. For example, Zynga’s (NASDAQ:ZNGA) shares are up about 48% for 2012.
But the momentum trade can easily fizzle. As I recently pointed out, the market could be vulnerable to a pullback. And while the major indices are getting hammered today, there’s still plenty more room to go. If the market does keep retreating, downward pressure on social IPOs could be intense. With that in mind, here are three IPOs to avoid:
True, the company is a leader in social gaming and is the dominant operator on the Facebook platform. Last year, the company generated a whopping $1.1 billion in revenues.
To keep up the growth, Zynga recently launched the beta version for zynga.com. It should lead to increased money-making opportunities, as it will allow games from third-party companies. Zynga also could be a big beneficiary of the legalization of online gambling. The company already has made huge inroads with its Texas HoldEm Poker game.
Regardless, investors have really gotten overeager with the stock. It even has gotten JPMorgan (NYSE:JPM) analyst Doug Anmuth worried, and he changed his rating on ZNGA from overweight to neutral. Anmuth thinks it will take some time for zynga.com to get results — which is reasonable, as it’s not easy to put together a destination site. Not to mention, it still is unclear when and if online gambling will become legal in the U.S.
Since reaching a low of $14.85 per share in late November, Groupon (NASDAQ:GRPN) has been able to regain some of its mojo, climbing back more than 20% to above $18.
Still, investors run many risks with Groupon. Even though it is the dominant player in the daily-deals business, it still must fend off tough rivals like Google (NASDAQ:GOOG), Amazon (NASDAQ:AMZN) and LivingSocial.
Groupon also has a labor-intensive business model, with more than 10,000 employees. It’s not easy to scale a business that is focused on local merchants.
Groupon posted a loss of $43 million in the latest quarter despite revenues almost tripling to $506.5 million. This should be investors’ biggest concern: In light of its size, shouldn’t the company be generating profits by now?
Yelp (NYSE:YELP) operates a platform that allows for reviews of local businesses, and it had a spectacular IPO last week, soaring over 64% to $24.58. However, investors are already getting skittish, and the stock is now back down to about $20.
Even with the drop, Yelp is trading at 13 times revenues, compared to roughly 8 for both Groupon and Angie’s List (NASDAQ:ANGI). If the honeymoon truly is already over, Yelp still could have more reversion to go.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.