We see the potential for a shortable upside move in our long time poster child for inflated late-stage social networking and clean tech valuations, GSV Capital ( GSVC , quote ) after a lengthy story in Barron's promoted GSVC once again as a vehicle for retail investors to get into the social space. With Barron's highlighting GSVC as the way for "the little guy to get in on the action", we look for a sharp move upward on Monday -- already taking place, with shares up 4.50% -- and would like to be able to establish short positions over $16.
As we will discuss in detail below, if we are going to pay $7 billion for a social networking company, we would vastly prefer LinkedIn ( LNKD , quote ) -- which in our view has some real fundamental and business model positives -- than a Zynga in the public market or amazingly, a Twitter in the private market.
What is truly ironic about the timing of the Barron's story is that it sits beside headlines addressing a dramatic reduction in valuation expectations for Zynga as that company plans to start its IPO roadshow this week.
Likewise, while the article mentions GSV's investment in Groupon ( GRPN , quote ) and the fact that they managed to take that company public, it somehow failed to mention the price at which GSV invested.
Like late-stage investors in Zynga, that price is actually higher than the current price. GSV spent the equivalent of $25 a share for its stake in GRPN. Unless they somehow overcame lock-up provisions and sold out at the very top, they are still deeply underwater.
From the outset we have viewed the mere existence of a vehicle such as GSVC -- and indeed the existence of the unregulated secondary markets that in part enable it -- as clear signals of a bubble in social networking valuation in particular.
We expect it to end very badly for GSV, given the fact that the company made substantially all of its investments over the summer at peak valuation levels and its reason for existence becomes less compelling as companies like Zynga and Groupon hit the market.
As for Zynga, GSV's investment is in the form of rather bizarre $4 million one-year note that pays rates of interest based on the valuation of the company: 10-20% if ZYNG prices at $6 billion to $14 billion, with equity participation above that level and loss of principal below.
It is perhaps a sign of the "efficiency" of the late-stage private markets that the last Zynga trade on SharesPost, in which GSVC also has an investment and on whose board GSV principal Michael Moe serves, is valued at $20 per share, or more than twice the current IPO range .
It is also notable that fully diluted shares increase by 100 million for Zynga for a total float of 800 million post-deal -- and hence an $8 billion valuation if it prices at the top of its range. Again, I currently see these shars crawling by on the Sharespost website at $12 billion for $20 per share, indicating that in addition to a bad price the private market has a bad share count.
Like many of its social networking peers, growth has slowed dramatically for Zynga this year, though unlike Groupon, Pandora, Zillow and others, Zynga is however solidly profitable.
The company's bookings have stalled at just over a $1.1 billion annual run rate the last three quarters, with EBITDA declining precipitously to around a $250 million run rate from closer to $400 million last year at far lower revenue levels.
And this speaks to the fundamental notion that social models are somehow different or more profitable than traditional Internet models or in this case traditional video game models. At some distance, it sure looks like Zynga has not had a big hit in a while and is investing heavily to try and produce one, much like its console-based peers.
Thus, with sequential revenue growth slowing to 10% last quarter and bookings growth flat, it is hard to see paying 30X EBITDA or more for Zynga.
Finally, given the significance of Zynga's revenue contribution to Facebook,there are clear implications for GSV's valuation here, since that company just added another $3 million in Facebook a few weeks ago to bring their total investment to about $10 million -- at a $70 billion total valuation.
Having seen how well the whole GRPN process went, apparently Twitter executives are looking to emulate that, with recent commentary to the effect that Twitter is going to be a "massive business" from its chief revenue officer.
This sounds much like the "wildly profitable" comment from GRPN chairman Lefkofsky during the GRPN quiet period. One might think that investors currently paying around $19 per share for Twitter or about $10 billion according to Sharepost believe the business is already massive.
Tim Savageaux of Terrapin Research .
Terrapin Research: Terrapin is focused exclusively on the rapidly expanding market for technologies that deliver increased bandwidth over communications networks and the applications and service providers that drive and deploy these technologies.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.