Today’s Tech IPO’s Never Had a Chance

There are several reasons why recent technology IPOs have flopped, ranging from evil investment banking activity to unsustainable business models (and the two aren’t mutually exclusive, either). But, as the trend continues, and investors get more fed up, the older, more established tech companies look better, safer, and cheaper. For tech investors, why pay high prices for uncertainty when they can buy into tech’s equivalent of a blue chip?

A changing landscape
Technology stocks have long been associated with high risk and high reward. Getting in on a hot tech IPO was the way to play tech in the 90s, before it all came crashing down. As time goes on, and the strong sustainable firms have revealed themselves, it makes less and less sense for a tech investor to focus on IPOs. For those who chase the high-growth technology market, there are now options that are without the risky and unpredictable elements of the industry. 

Introducing all the companies you know…
Yesteryear’s IPOs are today’s best tech investments – or, at least the ones that are still traded are. A company like Amazon (Nasdaq: AMZN  ) had its public birth amidst many tech IPOs, when investors who wanted in on Internet businesses had to choose from a list of brand spankin’ new companies with risk profilse that would give Warren Buffett heart palpitations.

Amazon, as you are aware, did quite well. So did Google and eBay (Nasdaq: EBAY  ) . Google may have been the most difficult company to forecast at the time, because few understood the profitability of a search engine (and few still do). But Amazon -- an internet-based retailer that can dramatically reduce overhead while offering lower prices to customers all over the world --made sense as a business. Online auctioneer eBay made sense, as well. Later on, when eBay acquired PayPal, the online payment processor, it made even more sense. These are businesses that, though speculative at the time of their IPOs, were much more like the stocks we looked at before the Internet took over.

…and the new guys
People have been complaining about IPO flop after flop when it comes to technology. Just look at the business models, and compare them to their predecessors.

Facebook (Nasdaq: FB  ) brings in almost one billion people to a site where you're encouraged to linger and view your friends’ senseless political views and party pics -- all for free. Sure, there are advertisements on the side of the page, but that’s not why you’re there, and you likely don’t want to leave. Google, on the other hand, is a launch pad for you to go somewhere else. No one types Google into their address bar just so they can peruse search results. The beauty of Google is that we go to it so we can immediately find what we actually want. This kind of website makes sense if you're built on an advertising revenue model.

Groupon (Nasdaq: GRPN  ) went around telling businesses to lose money on their products or services so that customers will come through the door and become eternal patrons. Did that ever make sense to anyone? Apparently, yes. The guaranteed business part was great, and had businesses around the world signing up like crazy. But when I buy a Groupon to go paintballing for $4, I’m not going to leave the place with the unlimited monthly pass for $1,000. All that happened was that I got to shoot my friends in the face with paint for next to nothing, and the company got to tell me to come back some time and actually pay. Okay, sure paintball salesman, I’ll see you real soon. Groupon’s business never made sense, and it shouldn’t be a surprise that the company is trading at its all-time lows.

Even if they were real businesses
Let’s say Facebook and Groupon didn’t have totally, completely, obnoxiously awful business models, to be fair. At this point in time, if I want to invest in the Web, I would rather pay 13.5 times earnings for a company with established, functioning business models and a massive presence on the web. That’s Google’s forward P/E. Or, better yet, I would much rather pay Apple’s (Nasdaq: AAPL  ) 12 times earnings for a company that has completely dominated smartphones, tablets, web-based media sales, and has the highest revenue per square foot of any brick and mortar store!

Why would I even consider paying 33 times earnings for Facebook, when it hasn’t been able to succeed in the mobile arena, and its advertisers are publicly questioning its efficacy? Sure, Groupon is only 11 times forward earnings. But tell me this, when is the last time you wanted to invest in a company who consistently has to restate their wonky earnings reports, and has had sequential quarterly sales growth come to an almost standstill? I wouldn’t pay three times earnings for a company on that path.

Sure, the tech IPOs have had their individual day of blunders and little mishaps but, perhaps people aren’t buying into these companies like they used to simply because there are far better options available in the space.

As for Apple and Facebook, our analysts have provided you with a more detailed vision of the future of these companies. Read the premium reports, linked above, to see the opportunities and hurdles that lie ahead for both firms.

Fool Contributor Michael Lewis owns none of the stocks mentioned above. You can follow him on Twitter @MikeyLewy. The Motley Fool owns shares of Apple, Facebook, and Amazon.com. Motley Fool newsletter serviceshave recommended buying shares of Amazon.com, eBay, Apple, and Facebook. Motley Fool newsletter serviceshave recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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