Tech stocks bask in Facebook's glow
Tech stocks related to social media, like Groupon and Zynga, see shares rise after Facebook IPO. But boost for these tech stocks could be temporary.
Facebook filed to raise about $5 billion Wednesday in what would be the largest Internet IPO ever.
A possible valuation of $75 billion to $100 billion for the world's largest social networking company encouraged some investors to lift valuation estimates on other companies in the sector, according to Sameet Sinha, an analyst at B. Riley & Co.
"When a major IPO like this gets going, all stocks in the same sector get a boost as they are valued relative to the IPO," Sinha said.
Groupon shares jumped 8.3 percent to $23.28. The stock hit $24.22 earlier, the highest since Dec. 16.
Groupon does not run a social network, but the largest daily deal company is often lumped into the sector because its business has some social networking aspects. The company's deals are often shared by subscribers through Facebook and they are triggered when a certain number of consumers purchase the coupon.
Zynga, the largest social games developer, has a closer relationship with Facebook. Wednesday's IPO filing revealed that Zynga accounted for 12 percent of Facebook's $3.7 billion in revenue last year. That information helped Zynga's shares soar to their highest level since the company's December IPO.
Such gains may be temporary, especially for companies like Groupon that have less of a direct relationship to Facebook, Sinha warned.
When Facebook's IPO progresses, investors will likely need to sell some of their existing holdings of social networking stocks to raise the cash required to buy Facebook stock, he explained.
"When the IPO actually happens, where do you get the budget to buy that stock? You sell from some of the related holdings," the analyst said. "There is only so much allocation that investors can have to social networking stocks."
Sinha and others said Groupon shares may be climbing for other reasons.
Groupon is due to report its first quarterly results as a public company on Feb. 8. Companies that have recently sold shares in IPOs typically report strong results during the first few quarters following their debuts, Sinha explained.
IPOs involve persuading lots of new investors to back business models that are often riskier than those of more established public companies.
"If they come out and miss their first quarter, they destroy trust on Wall Street," Sinha said.
Groupon is expected to report earnings of 3 cents per share on revenue of $475 million, according to Thomson Reuters I/B/E/S.
LivingSocial lost $558 million in 2011, Amazon reported in a regulatory filing Wednesday.
That suggested the competitive threat from LivingSocial may not be as strong as previously thought, putting Groupon in a more positive light, Houston said.