Zillow CEO expands on tech valuation Twitter storm

Zillow's embrace of social media
Zillow's embrace of social media   

While the Alibaba road show kicked off this week ahead of its initial public offering, likely to be the largest ever, Zillow CEO Spencer Rascoff launched a Twitter storm about tech IPO valuations.

In 25 tweets, Rascoff expressed critical questions for dot-com names that had to be addressed for those companies to see their value grow.

"The point I was making is that when IPOs come out, when companies file S1s and they have road shows, there's so much noise, there's so much information because it's the first time that investors can get a good look at the inside workings of the company, that usually there are one or two questions at the IPO that end up being the critical determinate of how the stock performs a year, or two, or three years later," he said Wednesday on CNBC's "Halftime Report."


Expanding on his tweet regarding Twitter, Rascoff added, "In the case of the Twitter IPO, the question people were asking back then was: Can Twitter explain to new users what the heck this service is and why they should use it? And I think Twitter has done a great job of trying to address that problem. It's still probably the biggest question facing the company. And it was the biggest question at IPO time."

That "fundamental" question, he said, was the one that the company addressed, leading its stock higher of the next couple of years.

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Yet the sheer volume of information can make it difficult to discern the critical data points for a pre-IPO company, Rascoff said.

"I think the right question's usually buried alongside 20 other questions," he said. "In the case of Zynga, the fundamental question was, 'Is this a hit-driven company, where they have to keep producing new titles, or not?' Well, that was one question investors were asking. They were also asking 100 other questions. So, sometimes the signal got lost in the noise."

Alibaba headquarters in Hangzhou, Zhejiang province, in China.
Reuters
Alibaba headquarters in Hangzhou, Zhejiang province, in China.

Rascoff owns shares of TripAdvisor, Zulily, Facebook, Twitter, Google and GoDaddy.

Alibaba, Rascoff said, would trade following its IPO on simple supply and demand. But over the long term, the fundamental questions would come into play.

"I think having a short-term time horizon with an IPO is very, very risky," he said. "All of Wall Street is an insider's game in some sense, and no case more so than IPOs. So, it's very difficult for a retail investor, a viewer, to benefit from an IPO because the stock trades so quickly, the allocations are so scarce, others are in front of you. It's very, very difficult. So, if you have a short-term time horizon, as I tweeted, IPO investing is not for the meek."

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Yet Rascoff said he would "probably" buy Alibaba stock at the IPO price.

"If I have a five-year time horizon, this thing is Amazon, plus Facebook, plus Google, plus Snapchat, plus eBay—in China," he said. "Five years from now, do I think it's going to be worth more than it prices at? Absolutely. Is it going to be crazy volatile between now and then? Definitely."

By CNBC's Bruno J. Navarro