1/25/2011 3:26 PM ET|
The return of the Internet IPO
The market seems ready to party like it's 1999 as investors eagerly await shares of Facebook, Twitter, Groupon, Kayak and other popular names. But should you dive in?
Still, there are some good opportunities to make money in the big wave of Internet companies going public this year, as long as you watch the prices and buy selectively.
Some with the best potential include Kayak Software, an online travel company, Skype, which is still shaking up the telecom world, and Demand Media, a content company.
What numbers do leak out suggest troubling valuations. Facebook, which despite the buzz seems more likely to go public in 2012, looks pricey if you believe the $50 billion valuation and an estimated $2 billion in sales often cited in the press. Given its rapid growth, that valuation could get more reasonable, though. Marketers will spend $4 billion on Facebook advertising this year, predicts eMarketer. But we'll have to wait for public filings to know anything for sure.
Before we take a closer look at the big upcoming Internet IPOs, let's consider why we are now in Internet Bubble 2.0.
1. IPO valuations are crazy again
I recently spoke with "Investing in IPOs" author and dot-com millionaire Tom Taulli about all the hot Chinese Internet IPOs now hitting the market. The conversation brought a troubling déjà vu -- because the charts and valuations of these companies seemed so much like the risky Internet IPOs folks were buzzing about in 1999.
Take the Chinese online TV company Youku.com (YOKU, news) and E-Commerce China Dangdang (DANG, news), a Chinese online retailer. Youku.com rose 161%, and Dangdang jumped 87% their respective first days of trading in December.
Youku.com has a price-to-sales ratio of 75. That's a common measure of valuation; to show you how crazy a 75 ratio is, Yahoo (YHOO, news) trades for just 6.8 times sales. Dangdang goes for a price-to-earnings ratio of 219, compared with 50 for Amazon.com (AMZN, news).
2. Elitism is back
In the late 1990s, bankers took a lot of heat for handing out hot IPO shares to corporate executives and favored clients. This kind of cronyism always seems to get worse when markets overheat. So it wasn't encouraging to see Goldman Sachs Group (GS, news) recently create a special investment vehicle to try to get around U.S. securities law and give its elite investors early access to Facebook well before any IPO.
So it's quite possible investors who aren't those favored clients will face the same conditions they did during the tech boom (and most major IPOs since then, to be honest.) You'll have to buy at inflated prices in the hours and days after shares hit the market, or wait in hopes they dip as time goes by.
Which of course, is not what you're hoping for if you chase a hot IPO.
3. The magazine cover kiss-of-death returns
Back in December 1999, Time magazine marked the top of the Internet bubble by putting Amazon CEO Jeff Bezos on its cover as person of the year. The crash started in March 2000, and it would take 10 years for Amazon stock to recover. Investors cite this as an example of the "magazine cover indicator" -- where popular magazines often mark the top for stocks, with cover stories on bull markets.
Ominously, Time put Facebook founder Mark Zuckerberg on its cover as person of the year last month.
So be warned. "Whenever you have these IPO boomlets and the market gets hot, that's usually a risky time to buy," cautions James Angel, a professor of finance at Georgetown University's McDonough School of Business.
On the bright side, IPO experts like Angel and Lise Buyer of Class V Group, which helps companies navigate the IPO process, say it's positive that so many companies are going public now, given all the concerns that the number of U.S. listings is shrinking. "The IPO market is not broken, it's selective, and that is a good thing," says Buyer. (Read "How the stock market is killing jobs" for more on this.)
Now here's a closer look at some upcoming Internet IPOs to play -- or to avoid.
Kayak scours the Internet for the best deals for travelers. It collects fees from airlines and hotel chains when travelers book trips. It also makes money from advertising.
Started by the co-founders of Expedia (EXPE, news), Travelocity and Orbitz Worldwide (OWW, news) in 2004, Kayak could have its IPO within the next few months. The recent strength of the shares of online travel companies Priceline.com (PCLN, news) and MakeMyTrip (MMYT, news) suggests there will be a lot of interest, says Nicholas Einhorn, a research analyst at Renaissance Capital, which specializes in IPO investing.
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People just don't learn, do they? Facebook is pure air, no assets, no intellectual capital, very few employees. Companies like that can vanish overnight and nobody will care.
And that 50 billion $ valuation: please... An intellectual no-assets company is always valued at about its yearly income, precisely because it can dissipate so quickly.
Facebook is worth 4 billion at most and we all know that G-S created a fake valuation with that purchase of a percentage of the company for 500 million. Now they can get their investment back ten-fold on the day of the IPO release with sheep getting into another Wall Street pyramid.
Fact is, if people are willing to spend that much, then thats how much that product [in this case, facebook.com] is worth.
As I said: people never learn... Nobody is willing to spend anything close to 50 billion on Facebook.
I don't know how clearly I need to spell it out for some poeople to get this: G-S have spent only 500 million of Facebook. That's it. The have spent that money on some arbitrary percentage of the Facebook to bump up its valuation.
Now they need some suckers, oh... sorry... "investors" to buy the IPO stock of Facebook valuated at 50 billion and they make a killing to the tune of 5 billion of pure profit on it.
Facebook has a revenue of 4 billion a year. We don't even know how much of that revenue is actually profit. Probably a lot since they do not produce anything and Facebook is a very poor quality software (cheap to develop, expensive to modify and maintain in the long run).
Even so, let's assume a pure profit of 3.5 billion a year. That means if you buy stock of Facebook as IPO you need to wait 15 years to get even from your initial investment. 30 years for it to double. There is nothing about Facebook that has a 30 years longevity to it. Cars age in the 5 years cycle. Consumer software apps in a 6 months cycle.
That means 30 years for Facebook is the same as 300 years for GM... How well is GM doing after less than 1/3 of this period?
Not the same for Facebook... there's that magazine cover indicator you were talking about. Does the popularity of the magazine ever relate to how badly the IPO turns out?
Elitism and nepotism have always been around, except that at present, it's an "in your face" type and it's out of control. The Republicans are the kings and queens of Elitism and nepotism! I'ts only going to get worse until the "Revolution" takes place.
Facebook is pure air, no assets, no intellectual capital, very few employees
Its called "Advertising" and "facebook.com". What other assets do they need?
Fact is, is people are willing to spend that much, then thats how much that product [in this case, facebook.com] is worth.
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