10/28/2013 7:15 PM ET|
This isn't your parent's tech bubble
Sky-high valuations for unprofitable tech startups stir memories of 1999, but there are some differences.
Twitter plans to go public at a value of $11 billion, without turning a profit. Venture capitalists just valued Pinterest, which generates no revenue, at nearly $4 billion, and an even younger, revenue-deprived company, Snapchat, is angling for a similar price tag.
It isn't quite 1999, when dot-com companies with scant revenue made initial public offerings and tripled in price on their first days of trading. When that bubble popped in 2000, scores of companies went bust, and millions of small investors suffered losses.
Now, shares of Internet companies are soaring again, and signs of pre-2000 exuberance can be seen in Silicon Valley and the nearby area. Home prices in San Francisco and surrounding counties rose more than 15 percent in the past year. Office rents in San Francisco are 23 percent above their 2008 peak.
"It's gotten pretty frothy," says Daniel Cole, a senior portfolio manager at Manulife Asset Management who has invested in highflying IPOs, including for Rocket Fuel (FUEL). The Redwood City, Calif., online-advertising company sold shares to the public last month at $29 each. They traded at $61.72 a share Friday, giving Rocket Fuel a market valuation of $2 billion, without having recorded a profit.
Technology and finance veterans say this time is different -- and it is. Companies going public are more mature, the leadership teams more seasoned, the business models more proven. Social networks such as Twitter and Pinterest are drafting off the success of Facebook (FB), which sports a market value of $126.5 billion, or about 70 times next year's expected earnings.
But the current surge is accelerating, aided by some little-appreciated factors. Big companies are scarcely growing, and interest rates remain near zero, boosting zeal for investment opportunities in companies with high-growth potential. Moreover, a federal law enacted last year will allow startups to raise money from smaller investors, opening a vast new pool of potential funding.
"People are reaching for growth," says Kenneth Turek, who manages the $850 million Neuberger Berman Mid-Cap Growth Fund, and has passed on this year's tech IPOs.
Even some executives benefiting from the rally question its underpinnings. Tesla Motors (TSLA) Chief Executive Elon Musk on Thursday said the electric-car maker's stock price, which has quintupled this year, "is more than we have any right to deserve." Tesla, which has reported one profitable quarter since going public in 2010, is valued at $20.6 billion, seven times its expected 2014 sales, according to S&P Capital IQ.
Netflix (NFLX) Chief Executive Reed Hastings this month told investors in a letter that the video service's stock was benefiting from "euphoria" driven by "momentum" investors. Netflix shares have tripled this year.
By most measures, today's tech-stock mania falls well short of the dot-com era. Many of the companies going public have substantial revenue. When Pets.com completed an IPO in early 2000, it had recorded lifetime sales of about $6 million. Less than 11 months later, the company had dissolved.
This year, shares of newly public technology companies are being valued at 5.6 times sales, estimates University of Florida professor Jay Ritter, who tracks IPOs. That is well short of the median of 26.5 times sales in 1999. Shares of this year's tech IPOs have risen an average of 26 percent on their first day of trading. In 1999 the average was 87 percent.
The average tech company to go public this year is 13 years old, compared with four years old for the IPO class in 1999. Tech's presence in the IPO universe has receded, too. One-fourth of this year's IPOs have been for tech firms, Ritter's data show. In 1999, more than three-fourths were in the tech sector.
"The big difference now is companies like LinkedIn (LNKD), Twitter, Facebook have demonstrated an ability to generate sales, and with the exception of Twitter, profits," Ritter says. In the dot-com days, "there were all sorts of companies going public that were essentially startups."
But investor enthusiasm is filtering down to younger, less-proven companies today, too. Pinterest, an electronic-scrapbook service that began testing ads this month, said Wednesday that it had raised $225 million from venture-capital firms. Pinterest didn't need the money; the company said it hadn't spent any of the $200 million it raised in February when it was valued at $2.5 billion.
The new investment values the three-year-old company at $3.8 billion, a 52 percent jump in eight months.
More from The Wall Street Journal:
VIDEO ON MSN MONEY
"Technology and finance veterans say this time is different -- and it is. Companies going public are more mature, the leadership teams more seasoned, the business models more proven. Social networks such as Twitter and Pinterest are drafting off the success of Facebook..."
Famous stupid words... this time is different. Not. What we have here is a failure to be in touch with Reality while imagining a fictitious customer base that endlessly thrives on banner ads. Today's technology is NOT comparable to the Dot-Com era. Back then it was building inroads without eliminating jobs. Today, it is making trillionaires out of folks who go to You-Tube for a video on hole-digging. Facebook is a disease, not a success. It's bell-curve has already passed the top and is sliding. Millions have idle accounts or closed them. LOOK out your window. The FACT has to kick in soon that Tech is a train wreck and restoration of economy is going to take us WAY back to primitive gyrations. It's impossible to recover the parts-- they were sold to China and scrapped to ensure we are indentured.
I don't invest in any company that's not making a sustain profit - PERIOD !
Anyone that does is a Gambler, a Fool or BOTH !
And There is always someone claiming it's not the same concerning potential loses. Worthless stocks then and worthless stocks now. Record margin buying then, record margin buying now. Just as then as will be now, some trigger Event will send them crashing to true value, somewhere around ZERO.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
[BRIEFING.COM] Equity indices continue holding modest gains with participants awaiting the public debut of Alibaba.com (BABA), which will represent the biggest initial public offering to date. According to recent indications, the stock is expected to open in the $90-91 range after pricing at $68/share.
On a separate note, the Dollar Index (+0.4%) hovers near its best level of the session, which also represents the high water mark from June 2013. The greenback holds gains against ... More
More Market News
|There’s a problem getting this information right now. Please try again later.|
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'