1999 was an interesting year to be an investor to say the least. 486 companies went public with eight logging gains of greater than 350% on their first day of trading. As we learned years later, these valuations simply weren't sustainable, and many of these companies either perished or are nowhere near where they once were.
Here's a quick "where are they now" on 1999's top IPOs:
|Company||IPO Price||First Day Close||Percentage Gain||Where Are They Now?||Change Since First Day Close|
|Foundry Networks||$25||$156.25||525%||Purchased in 2008 for $19.75/share||N/M|
|Cobalt Networks||$22||$128.13||482%||Purchased in 2000 for $57/share||N/M|
|MarketWatch.com||$17||$97.50||474%||Purchased in 2005 for $18/share||N/M|
|Ask Jeeves||$14||$64.94||364%||purchased in 2005 for $33.46/share||N/M|
Source: Yahoo! Finance, Hoover's, *Accounts for 1-for-10 reverse split, **Accounts for 1-for-8 reverse split, N/M = not meaningful.
That isn't a pretty list. Shareholders of Cobalt Networks should consider themselves lucky to have received $2 billion for their stock when purchased by Sun Microsystems in 2000 because all of Cobalt's products were retired by Sun just three years later. The remaining companies on this list faired very poorly, as you can see.
The question I pose is this: Have IPO investors really learned anything since 1999? I'm not inclined to think so.
Take a look at last year's class of Internet IPOs and tell me if you notice a trend. Also, keep in mind as a comparison that the average S&P 500 company trades closer to two times book value and seven times cash flow.
Source: Morningstar, N/M = not meaningful
As far as I'm concerned, we haven't learned a darn thing and are right back into our habits from 1999.
Pandora Media relies on advertising to generate more than 85% of its revenue, and the last time I checked, the vast majority of Internet-based companies that relied on ads for their revenue back in 2000 perished. Renren, dubbed the Facebook of China, grew revenue by 57% in its latest quarter only to lose money as operating expenses ballooned 146%! Zynga has ridden Facebook's coattails higher and could find itself in a precarious position when it needs to renegotiate its contract with Facebook. Zynga currently relies on Facebook for around 90% of its revenue. Tudou Holdings, just like Pandora, relied on advertising revenue for 85% of its sales. Even worse than Pandora, however, is Tudou, which has not yet turned a profit. Finally, LinkedIn, a name I've been parading against since day one, has marked eight straight quarters of "accelerated revenue growth" and still can't turn a GAAP profit!
With the Facebook IPO right around the corner, even with 483 million daily active users, the justification for a P/E ratio of 100 just isn't there -- just as the valuation on these recent IPOs is likely to fall over time. The real question is, when will investors learn from their mistakes?
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