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Lots of hype, but where are the ‘likes’?

Issue Date - 02/02/2012
With multi billion dollar valuations of tech companies (social networking companies in particular) in 2011, the technology world was abuzz with possibilities of a new tech bubble. But the performances of these stocks last year paint a different picture as investors seem to be extremely cautious about genuine financials; unlike 2000, when they were enthralled by just impressive ‘on paper’ business models

Bubbles, whether they crop up in technology, real estate or the financial sector are funny things. When they’re actually there, spin doctors and pundits keep denying their existence; assuring business communities at large that the situation couldn’t have been better. And when they’re not there, everyone goes ballistic with doomsday predictions galore. In 2011, the technology sector experienced the latter phenomenon, thanks largely to the precedent that tech stocks set at the dawn of this century.

In 1999 (when the dot-com cycle was at an all time high), 308 tech companies had debuted on the bourses. The combined value of the 24 largest companies stood at $70.96 billion. Agilent Technologies, was then worth around $13.6 billion – the highest. In contrast, as per statistics compiled by Morgan Stanley in 2011, the combined valuation of just the top five most sought-after unlisted Internet start-ups (which were predicted to hit the bourses anytime by mid-2012), was estimated to be $71.3 billion. Today, Facebook alone is supposedly valued at around $75 billion.

Even we couldn’t resist the temptation of commenting on the possible aftermath of this ‘tech bubble’ (‘This time, the entire US GDP will be wiped off’, B&E Issue dated April 2011). We estimated that if a catastrophe similar to the dot-com bust of 2000 was to occur, stock markets globally would lose a monumental $14.77 trillion. But the question that comes to mind in hindsight is – were those concerns real?

The best place to start pondering on that is the 2011 tech IPO report card. A total of 41 tech companies went public last year. By the end of November, they were collectively down by 13% as compared to their listing price. Within a month of its debut (November), Pandora was down by more than 35%, trading below its IPO price. Other tech stocks met a similar fate. Nexon (a game developer for Facebook) was down by 11%, Zynga was down by 6% and Renren (a Chinese social networking site), which had raised $845 million and was up by 29% on its first day of trading, was down by 76%. One stock, however, did not disappoint and that was LinkedIn. The professional networking site, which boasts of 135 million members, went public on May 19, 2011. By the end of the first trading day, its share price had doubled. Interestingly, it is perhaps the only stock which is still trading at a premium of around 40% of its IPO price. Why is it then that the rest of the stocks tanked? Companies with real business models and revenue generation prospects will always thrive in the market. Had the likes of Groupon, Zynga and Pandora picked up well, then the horrifying possibility of a tech bubble would have been very real, as their revenue models are yet to clear the test of the market. Pandora, for instance, only recently reported that it had broken even per share in the quarter ending September 2011 compared to a loss of -$0.15 per share yoy. Confirming this, Sabeer Bhatia, best known as the co-founder of Hotmail, tells B&E, “Fifteen years ago, business models in the online segment were unproven, and generated just about 20% revenues. But now, new age Internet companies are very real, have real users and make real money.”


Today, there are 10 times the number of internet users than there were in 2000. Unlike the start-ups which cropped up then, tech companies now have a genuine customer base, which wants to avail their products and services. As a result, Facebook, LinkedIn and Twitter have a revenue per user of $4, $2.4 and 0.5 respectively. More importantly, in 1999, the pace of IPOs, venture funding valuations, and just as importantly, a broad-based rise in the stock value of old-economy companies, was at least 10x higher. “Without a large number of old-economy acquirers ready to buy new IPOs at inflated prices using their own inflated stocks, the bubbles will not merge into a boil” affirms Greg Blonder, former Chief Technical Advisor at AT&T.

Yes, the hype prevailed in 2011. But why is it then that investors behaved differently from the way they did during the dotcom boom? Lubos Pastor and Pietro Veronesi (Professors of finance at the University of Chicago Graduate School of Business) state in a research titled Technological Revolutions & Stock Prices that technological revolutions are followed by stock market booms and busts. According to the paper At first, risk, is mostly ‘idiosyncratic,’ because the new technology is initially developed on a small scale. As it becomes widely adopted, the uncertainty gradually changes from idiosyncratic to ‘systematic’. When systematic risk increases, prices decline.” So has the social networking/gaming-led stock market binge already fizzled out before it started? One would be inclined to say ‘Yes’ at the moment. Even the much awaited Facebook IPO may not shake things up too much if it happens, as shareholders will want to question the company’s ability to deliver profitability quarter after quarter, rather than simply swoon over its 800 million plus active user base. In that sense, Mark Zuckerberg is already late by miles, and if possible, he should wait for a general upturn in the old economy (before social networking took centrestage) to take the public route.

Amir Moin           

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