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Business News/ Opinion / Tech bubble: this time is different
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Tech bubble: this time is different

Technology IPOs are overvalued but the bubble may not burst soon

Illustration: Jayachandran/MintPremium
Illustration: Jayachandran/Mint

Fourteen years from the day the Nasdaq index of leading technology shares crashed, bursting the first dotcom bubble, there is fear that a similar hysteria seems to be returning to the markets. Already the Nasdaq index of technology-focused stocks has scaled highs last seen way back in 2000.

If last month’s $19 billion buyout of Whatsapp was attributed to the bulge in Mark Zuckerberg’s pockets, the 90% post-initial public offering (IPO) surge in stocks like Coupons.com is a warning that the generosity towards new tech companies is spreading. Coupons.com debuted last week raising approximately $168 million from its IPO which was priced at $16 per share, and opened at $27.10 surging to $33. Digital-advertising firm Rocket Fuel Inc. rose as much as 116% on its first day of trading in September last. Taken together with 2013’s debuts of Twitter Inc. and Zulily Inc., these moves have sent US IPOs to their biggest first-day gains since 2000. As more and more companies come to the market with ambitions to change the way the world shops or chats but with scarce profits, the frothiness and irrational exuberance of the first dotcom wave seems to be back.

A reminder, in case we do need one: in 1999 there were 457 IPOs, mostly related to the Internet and technology. Of these, 117 doubled in price on the first day of trading. And then between 11 March 2000 and 9 October 2002, the Nasdaq Composite lost 78% of its value and most of these early birds collapsed spectacularly. The collateral damage from the market mayhem was felt even by solid old tech stocks such as networking equipment giant Cisco Systems, which lost billions in market value from its peak partly because it had joined the party supplying equipment to embryonic firms on credit.

The apparent insanity of those days seems to be back as the record highs of the S&P500 have also seen a surge in investor margin debt which for the past three months has eclipsed the previous records set during both the earlier dotcom and housing bubbles.

What drives investors to new, unproven companies especially in frontier areas of technology? Portfolio managers typically look for exposure to growth. And any list of the fastest revenue growth industries over the next 10 years would have to include such areas as big data and analytics, social, mobile, gaming and Internet software, and e-commerce services. Crucially, however, coming on the back of a revolution in broadband connectivity, most of these firms are delivering real value to consumers. That holds good for enterprise customers as well. Gartner’s forecasts for global IT expenditure predicts that spending by companies on software will be particularly strong—nearly 7% higher in 2014.

The webvans and the pet.coms, poster boys of the last dotcom bust, were companies in search of a market. Not so for today’s leaders. Amazon.com has revamped the entire publishing industry with the TV industry lined up next. The company’s full year 2013 sales were up 22% and operating income was up 10% with online commerce continuing to be one of the fastest growing industries in the world.

And that may be why this time it is different. The difference lies in the vintage and the fundamentals of the start-ups. The companies that went public in 1999 had been in existence for an average of four years, while they are on average 13 years old now when they float. Most IPO stars of 1999-2000 never hit their opening-day price again. By contrast, Twitter and Coupons.com and Rocketfuel have all consistently beaten their opening post IPO price, indicating that investors were not looking to make their money and run. There will be stocks that will fizzle after their IPO sizzles and there is a question mark over Facebook, whose price to earnings ratio of 117, when the whole world is already on it, raises serious doubts over its growth prospects. By contrast, Rocketfuel is relatively small and therefore less understood and so could have a huge hidden upside.

The spending binges of the past paved the way for Americans’ new-found thrift which in turn has led to bidding up stocks. But since this has been through funds, neither will the pullout be so rapid nor is the investing completely irrational. Bubbles burst usually when they are driven by debt. So even though California’s dress code has rapidly changed from grunge to dapper and fancy beer gardens proliferate to cater to the new tech billionaires, we may not yet be in bubble territory.

Will this time be different for tech stocks? Tell us at views@livemint.com

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Published: 11 Mar 2014, 05:50 PM IST
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