IPO Market Resets Dot-Coms Valuations

Valuations in the IPO market can often be perplexing. After all, it is the launch pad for emerging technologies, which can be tough to analyze.

But eventually, the IPO market will start to evolve consistent valuation metrics. In fact, this may be happening now for next-generation Internet companies.

Over the past year, the leaders have plunged. Take a look at the carnage:

It’s true that LinkedIn (NYSE:LNKD) remains the exception, with a post-IPO return of 119%. But it’s more of a business play. Similar to the strong overall  performance of the cloud computing companies, investors are much more confident about the business market’s growth prospects.

Instead, there has been a disconnect with the dot-com leaders and the smaller operators, such as Yelp (NYSE:YELP) and Trulia (NYSE:TRLA). The rationale was that these companies offered more growth potential.

Or maybe not.

When Yelp reported its quarterly results in early November, its shares plunged by 15% to $20.51. The stock is now at $16.93, which is near the IPO price of $15.

Trulia has followed a similar pattern. On its earnings report, the stock price fell by 19% to $17.38. As of now, the shares are trading at $15.60 (the IPO price was $17).

Generally, when there’s a disappointing quarter, the stock will take a hit and then stabilize. However, if investors are resetting the valuations for the sector, the drops can grind on for awhile.

It looks like this is also happening with pre-IPO companies. One case is Spotify. The streaming music company recently struck a $100 million financing at a valuation of $3 billion. But about six months ago, Spotify was looking for over $4 billion.

For the most part, the valuation reset is good news for investors. It should provide some nice opportunities in the IPO market, especially for those who are looking at the long term. But in the meantime, it may be a good idea to hold off. Values could still deteriorate further as money comes out of the dot-com sector.

Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook.“ Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.