The Second Dot-Com Bubble Is Raging, But "This Time Is Different"
"It's gotten pretty frothy," is how one portfolio manager describes the behavior in internet-based companies currently as signs of pre-2000 exuberance can be seen in Silicon Valley and the nearby area. As WSJ reports, home prices in San Francisco and surrounding counties rose more than 15% in the past year. Office rents in San Francisco are 23% above their 2008 peak. As SnapChat, Pinterest, and Twitter are set to join such illustrious names as RocketFuel; asset managers are careful to remind suckers investors that it's not at all like 1999 - companies going public are more mature, the leadership teams more seasoned, the business models more proven - but the "reach for growth" at all costs echoes Kyle Bass' remarks that "financial memory is no longer than two years," with even younger and more revenue-deprived companies come to market at massively elevated multiples.
"It's gotten pretty frothy," says Daniel Cole, a senior portfolio manager at Manulife Asset Management who has invested in highflying IPOs, including for Rocket Fuel Inc. The Redwood City, Calif., online-advertising company sold shares to the public last month at $29 each. They traded at $61.72 a share Friday, giving Rocket Fuel a market valuation of $2 billion, without having recorded a profit.
Technology and finance veterans say this time is different—and it is. Companies going public are more mature, the leadership teams more seasoned, the business models more proven. Social networks such as Twitter and Pinterest are drafting off the success of Facebook Inc., which sports a market value of $126.5 billion, or about 70 times next year's expected earnings.
But the current surge is accelerating, aided by some little-appreciated factors. Big companies are scarcely growing, and interest rates remain near zero, boosting zeal for investment opportunities in companies with high-growth potential. Moreover, a federal law enacted last year will allow startups to raise money from smaller investors, opening a vast new pool of potential funding.
"People are reaching for growth,"
"The big difference now, is companies like LinkedIn, Twitter, Facebook have demonstrated an ability to generate sales, and with the exception of Twitter, profits," Mr. Ritter says. In the dot-com days, "there were all sorts of companies going public that were essentially startups."
But investor enthusiasm is filtering down to younger, less-proven companies today, too. Pinterest, an electronic-scrapbook service that began testing ads this month, said Wednesday that it had raised $225 million from venture-capital firms. Pinterest didn't need the money; the company said it hadn't spent any of the $200 million it raised in February when it was valued at $2.5 billion.
The new investment values the three-year-old company at $3.8 billion, a 52% jump in eight months.
Snapchat, a two-year-old mobile-messaging service popular with teens, is considering raising up to $200 million at a valuation exceeding $3 billion, people briefed on the matter said Friday. That would be more than triple the valuation that venture firms placed on Snapchat in June, when it raised $60 million.
Another factor: Last year's Jumpstart Our Business Startups Act soon will make it easier for less-wealthy individual investors to back startups. Already, the law has made it easier for financiers to pool money from individuals.
Some people worry that the looser rules may end up hurting small investors.
As less-sophisticated investors jump into backing embryonic companies, "the odds aren't in those people's favor," he says. A lot of those companies will fail, "then all of a sudden all you have is a piece of paper to stick on the wall."