However, a handful of leading companies that dominate their particular niches and are benefiting from fundamental shifts in consumer behaviour, such as social games company Zynga and daily deals site Groupon, should still find their way to Wall Street unblocked, they said.
The internet’s IPO bubble had already started to deflate with the stock sell-off and lost more air on Monday as shares in LinkedIn, the social networking site for professionals that has become the symbol of the latest dotcom boom on Wall Street, fell hard. The stock was down 20 per cent at one point on Monday before recovering slightly to end the day at $75.47, a decline of more than 17 per cent on the day.
Other hot IPOs from earlier this year that have dropped sharply include internet radio company Pandora and Demand Media, an online media concern, both of which have fallen more than 50 per cent from their highs and now trade below their issue prices.
Meanwhile, the latest well-received internet IPOs, vacation rental concern HomeAway and online real estate company Zillow, have each fallen back nearly 30 per cent from their highs, although, along with LinkedIn, they still remain above their sale price.
The decline in LinkedIn in particular highlights how fears of an economic downturn have eroded the excitement surrounding high-growth internet companies, analysts said.
“LinkedIn is a hyper-cyclical stock, a large percentage of its revenue is linked to recruiting,” said Jordan Rohan, an analyst at Stifel Nicolaus. The company’s growth rate has accelerated steadily since the last recession to touch 120 per cent in the second quarter of this year, compared with growth of only 50 per cent in 2009.
The latest stock decline followed Friday’s decision by Morgan Stanley, which acted as a lead underwriter for LinkedIn’s IPO, to cut its rating on the stock from “overweight” to “equal-weight”. The change in outlook was unusual for an underwriter so soon after an IPO and came despite a strong earnings report last week that prompted the bank to increase its revenue and earnings forecasts for the company.
“Everything’s being driven by the macro [economic outlook] right now,” said Ryan Jacob, an internet investor based in Southern California. He added that the uncertainty could reduce valuations for forthcoming deals or make it hard for some companies to launch an IPO, but said: “There are still going to be strong leaders in social media and mobile that are enjoying such strong secular growth that the cyclical slowdown won’t affect them.”