Big Tech IPOs: Are We in Another Bubble?

Pets.com, TheGlobe.com, Kozmo, Geocities…

If observed the explosive growth of the Internet in the 1990s, those names may dredge up nostalgic memories of dial-up modems, dancing “under construction” gifs, and the sudden proliferance of dot-com startups.

The rise of the World Wide Web opened up a whole new world of opportunity, and entrepreneurs lost no time taking advantage of it. Suddenly it seemed that anyone could make millions just by buying a domain and starting a simple online business.

Startup founders raced to go public, either to speed up their business’s growth or to cash out and live it up. And investors got caught up in the excitement of the new online era, pouring money into all the booming new startups. The value of equity markets skyrocketed, with Nasdaq, which is dominated by the technology industry, going from 1,000 to 5,000 from 1995 to 2000.

But it was all too good to last. Many of the new companies burned through investor’s money and failed to turn a profit, and soon went bankrupt. Pets.com spent millions in TV advertising, but was liquidated less than a year after going public. TheGlobe.com, a precursor to modern social networks, failed to ever make any money. Kozmo, a grocery delivery service, ended up as one of the biggest disasters of the dotcom era, and Geocities, despite its ubiquity, never reported a profit and was soon bought out by Yahoo.

We’ve learned a lot about doing business online since the dot-com bubble burst. But could the recent financial successes of tech companies be making investors overconfidence again?

The IPO market has been growing quickly again, with billions more dollars invested in new tech companies every year and gains rising quickly.

Are we in the middle of another bubble? Check out the facts below on all the new tech IPOs, and decide for yourself whether investors are being deluded like the dot-com investors of the past.

big-tech-IPO-bubble

Transcript: Big Tech IPOs

IPO, or initial public offering, refers to a company’s first sale of stock to the public. Are we in another bubble? Let’s take a look at the tech landscape to find out.

What’s an IPO?

  • Companies can raise money by issuing either debt (loans) or equity (stock).
    • If the company has never issued equity to the public, it’s known as an IPO.
  • Companies can be:
    • Private: Dominos®, IKEA®, Hallmark®

      • Fewer shareholders
      • Do not have to disclose much information about the company.
      • Typically not possible to buy shares in a privately held company.
        • You can approach them about investing, but they are not legally obligated to allow it.
    • Public: Facebook, Twitter, Apple®, Google®, Amazon®, etc.

      • Thousands of shareholders
      • Must disclose financial data every quarter
      • Must allow investors to purchase stock.

Why Companies Go Public

  • Going public raises capital, and usually a lot of it.
  • Increased scrutiny usually means public companies will get better rates when they issue debt.
  • If there’s demand, companies can always issue more stock.
    • Mergers and acquisitions are easier to handle because stock can be issued as part of the deal.

What’s a Bubble?

  • A bubble is:
    • An economic cycle characterized by rapid expansion followed by a contraction.
    • A surge in equity prices, often more than warranted by the fundamentals and usually in a particular sector, followed by a drastic drop in prices as a massive selloff occurs.
    • A theory that security prices rise above their true value and will continue to do so until prices go into freefall and the bubble bursts.
  • People buy stocks at a high price thinking they can sell them for a profit.
    • They transfer resources to areas of rapid growth, i.e. technology.
    • Confidence is lost, and a crash occurs.
      • Resources are moved again, deflating prices.
      • Little long-term return on investment.
  • The “dotcom” Bubble:
    • Rapid rise in equity markets as a result of investments in Internet-based companies.
    • During the 1990’s, technology-dominated NASDAQ index rose from under 1,000 to 5,000 between 1995 and 2000.
    • The bubble grew because of:
      • Speculative (fad-based) investing
      • An abundance of venture capital funding
        • Investors poured money into the ’90s startups hoping they’d one day become profitable.
          • They wanted to be able to cash in on the growing use of the Internet
    • The bubble burst because many dotcoms failed to either turn a profit or meet their extraordinary valuations.

Successful Tech IPOs

  • Amazon.com (AMZN): Ecommerce giant

    • Went public on: May 15, 1997

      • Started the day at $18/share
      • Reached $100/share before dot.com burst
      • Dipped below $10/share after burst
    • Close of market price on 4/30/14: $304.13
      • Close of market price refers to the final price of the stock at the end of the day’s trading.
        • Offers the most up-to-date valuation of a security until trading commences again on the next trading day.
  • eBay.com (EBAY): Online auction pioneer

    • Went public on: September 21, 1998

      • Started the day at: $18 share
      • Ended the day at: More than $53/share
    • Close of market price on 4/30/14: $51.83
  • Priceline.com (PCLN): Travel accomodations website

    • Went public in: March 1999

      • Started the day at: $16/share
      • Ended the day at: $82.50/share
    • Dropped to below $10/share and faced issues in 2001.
    • Was rebranded to focus on hotels rather than airfares in 2002.
    • Close of market price on 4/30/14: $1,158.42
  • Twitter.com (TWTR) : Micro blogging website

    • Went public in: November 2013

      • Started the day at $26/share
      • Ended the day at $44.90/share
    • Close of market price on 4/30/14: $38.97
  • Zulily.com (ZU): Daily deals website

    • Went public in: November 2013

      • Started the day at $22/share
      • Ended the day at $37.70/share
    • Close of market price on 4/30/14: $42.52
  • LinkedIn.com (LNKD): Social networking site for professionals

    • Went public in: May 2011

      • Started the day at $45/share
      • Ended the day at $83/share
    • Close of market price on 4/30/14: $153.47

Unsuccessful Tech IPOs

  • TheGlobe.com: The web’s first social networking website

    • Went public on: 13, 1998
    • Posted the largest first-day gain of any IPO at the time
      • Started the day at $9/share
      • Ended the day at $65/share
    • Plunged from $97 to 10 cents within a two-year span because of the dot.com bust.
  • eToys.com: An online toy store

    • Went public on: May 20, 1999

      • Started the day at $20/share
      • Ended the day at $76/share
    • Stock priced dropped from $84 to 9 cents within a two-year span because they:
      • Were unable to keep up with Christmas orders
      • Over-invested in advertising and warehouse space
  • Pets.com: Pet supply store

    • Went public in: February 2000

      • Started the day at $11/share
      • Ended the day at $14/share
    • Stock dropped from $14 to 19 cents within a year before the company went out of business in November 2000.
  • King.com (KING): Online/mobile gaming company, makers of Candy Crush

    • Went public on: March 26, 2014

      • Started the day at $22.50/share
      • Ended the day at $20.31/share
      • Dropped by as much as 15% the first day.
    • Close of market price on 4/30/14: $17.15
  • Tremor Video (TRMR): Online video ad network

    • Went public on: June 27, 2013

      • Started the day at $10/share
      • Ended the day at $8.50/share
    • Close of market price on 4/30/14: $4.51
  • Zynga (ZNGA): Online/mobile gaming platform, makers of Mafia Wars, Farmville

    • Went public in: December 2011

      • Started the day at $10/share
        • Went up to $11.50 and fell back to $9.52 within the first 15 minutes of trading.
      • Ended the day at $9.50/share
    • Close of market price on 4/30/14: $4.05/share

2014 Pipeline

  • There are 590 tech companies in the IPO pipeline for 2014.
    • Half of them are Internet companies
    • These companies have raised $55.35 billion across 2,800 financing deals.
    • Many of these will never make it to IPO stage because they may:
      • Never gain enough public interest
      • Liquidate before reaching IPO status
      • Be acquired by another entity
  • California is home to more than half of the companies in the pipeline.
    • New York has seen a 50% increase in companies compared to 2013’s list, coming in with 41.
  • There are only 26 companies with a valuation at or around $1 billion. Some include:
    • AirBnB: Travel accommodations website

      • Valued at: ~$10 billion
    • Airwatch: Mobile device management

      • Acquired: VMWare paid $1.5 billion
    • AppNexus: Real time ad platform

      • Valued at: ~$850 million
    • Automattic: Parent company of WordPress

      • Valued at: ~$1 billion
    • Box: Cloud software company

      • Valued at: ~$ 2 billion
      • IPO planned for June 2014 or later
    • com: Coupons website

      • Valued at: ~$1 billion
      • IPO full value, started trading in March 2014
        • First Silicon Valley Tech IPO of the year
      • Dropbox: Cloud storage

        • Valued at: ~$10 billion
      • Pinterest: Virtual dreamboard social network

        • Valued at: ~$3.8 billion
      • Snapchat: Photo chatting mobile app

        • Valued at: ~$2 billion
      • Square: Mobile payment card reader and processing

        • Valued at: ~$5 billion
      • SurveyMonkey: Online survey service

        • Valued at: ~$1.35 billion

Inflated Tech Valuations

  • WhatsApp: Facebook purchased for $19 billion in 2014.

    • $12 billion in stock
    • $ 4 billion in cash
    • $3 billion in restricted stock
    • Valued at $42 per user, it generates $0.99/year in income.
  • Instagram®: Facebook purchased for $1 billion in 2012, with a mix of stock and cash.

    • At the time of the deal, the platform earned no revenue.
    • Estimates indicate ads on Instagram could pull in $340 million in 2014.
  • Oculus VR: Facebook purchased for $2 billion in a mix of stock and cash in 2014.

    • The company has:
      • ~$23 million in revenue
      • Virtual reality headset developer product priced at $350
        • Product is aimed at video game developers, not consumers.
    • As a social media platform, it’s hard to understand why Facebook would buy a company that’s targeted at video game developers.

With the sheer number of companies in the pipeline for 2014, and the inflated valuations we’re seeing for many new tech startups, we could be headed for another bubble. Only time will tell.

Sources

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