Twitter went public at an $11 billion valuation without turning a profit, and Pinterest, recently valued at $4 billion, is no different.
Snapchat, another incredibly popular social network, is hoping for a similar valuation for its pending stock sale. With so much excitement – and dollars – being thrown at these tech startups, many are beginning to wonder if we’re back in the early 2000s, where Internet stock prices rose so high that a bubble quickly followed.
Remember the first Internet Gold Rush? In 1999, the Internet saw its first true gold rush phenomenon with scores and scores of start ups launching, cashing in and then quickly dying off when the bubble burst. Thousands of companies went broke, and small investors lost money by the millions.
The scene is somewhat familiar in Silicon Valley where companies like Facebook are setting the stage for the new Internet boom – if we aren’t already in the midst of it. San Francisco and the surrounding areas have seen a housing costs increase of more than 15% in the past year. Rents in San Francisco are 23% higher than their previous 2008 peak.
Several online-based companies have seen stock activity and stellar IPOs, including some that are not as well known. For example, Rocket Fuel In, a Redwood City, CA online-advertising company started out with a share price of $29 at the start of October. Now it is traded at $61.72 per share, which puts Rocket Fuel’s market valuation at $2 billion – yet the company has never recorded a profit.
A different kind of boom. Still, even with the similarities to the first Internet boom, tech and finance veterans say that the companies in this new boom aren’t the same quality as those almost 15 years ago. The companies that are going public are more mature, their leadership has more experience and their business models are more reliable.
There’s another factor that is driving interest in the Internet stocks. Big companies are hardly growing. The interest rates are remaining near zero – which means that there’s a drive for opportunities to invest in companies that have a high growth potential. Twitter, Pinterest and their contemporaries are trying to reach Facebook-like status – which recently reported a market value of $126.5 billion (almost 70 times next year’s expected earnings).
And a new federal law regarding startups. Finally, there was a federal law introduced last year that allows startups to raise money from pools of smaller investors – which opens up investing to a larger group of people.
These conditions are all combining to create a good climate for investing in tech IPOs – even if the proof isn’t always there. Tesla Motor’s CEO Elon Musk questioned his company’s growth in stock price in the past year and wondered if the company had any right to deserve the quintupled rate. It has had just one profitable quarter in the last three years since it went public.
However, the numbers between the 1999 IPO bubble burst and today are far different:
- The number offerings during that year were 368, while 2013 has seen just 32 so far.
- There’s a nine-year increase in the median age of the company, and only one IPO has doubled in price on the first day of trading compared to 114 in 1999.
- Just 66% of tech IPOs today are unprofitable in their most recent fiscal year, while 86% of companies in 1999 were.
- The median ratio of market value to sales, at IPO is also positive for current trends – 2013 is at 5.6 while in 1999 the ratio was 26.5
Although some wonder whether looser rules and a warming market may be a sign of trouble to come, the cautious optimism and lessons learned from the past may be able to keep this from being another 1999.