Some analysts fear investors who have forgotten history are doomed to repeat it when it comes to Internet IPOs.
Just 11 years after the dot-com bust, one of the biggest periods of wealth destruction ever on Wall Street, investors are paying rich prices for newly minted Internet stocks again.
The renewed furor was clear Wednesday, when real estate website Zillow jumped 79% in its first day of trading. That’s the latest sign of investors’ growing eagerness to get a piece of new Internet companies, including:
•Escalating valuations for recent IPOs. Investors are paying $135 for each $1 in profit earned by home rental service HomeAway, and more than $1,000 for each $1 in profit at professional networking service LinkedIn, says Standard & Poor’s Capital IQ. In Zillow’s case, the company isn’t even turning a profit.
•Surging prices for companies yet to go public. Facebook isn’t expected to go public until at least next year, yet on private markets, the company commands a value of $82.4 billion, according to SharesPost. That exceeds the value of Disney at $74 billion.
•Rising supply of Internet stocks. So far, 25 of the year’s 79 IPOs are technology firms, IPOScoop says. And 14 of those tech IPOs are Internet companies with more to come, including coupon site Groupon later this year, Renaissance Capital says.
Investors “don’t look at rational valuation metrics,” says Francis Gaskins of IPOdesktop.com.
The same thing happened in the tech bubble. Among 10 of the most high-profile Internet IPOs from the sizzling 1998-to-2000 period, none made money for investors, and some produced massive losses, My Private Banking says. For instance, shares of social-networking pioneer TheGlobe are down 99% from their IPO.
Some experts say the mania hasn’t reached 2000 levels yet. This year’s 14 Internet IPOs pale next to the 272 in 1999 and 152 in 2000, says Jay Ritter, professor of finance at the University of Florida. And unlike 1999 and 2000, when many dot-coms didn’t even have revenue, all the Internet companies that went public this year do, Renaissance’s Paul Bard says.
But while the latest crop of Internet stocks may not crash, investors still may be disappointed, Ritter says. When investors pay such rich prices, even if the companies succeed, “with such high valuations, the possibility of a big upside just isn’t there,” he says.