I was chatting with a friend of a friend at a fundraising event last Thursday. Upon learning that I was a Technology banker, he asked me about my thoughts on the recent wave of Internet IPOs for companies such as LinkedIn, Pandora, Groupon, and (soon) Zynga. It was actually the first time someone approached me with this question, and I thought it be a good opportunity to exercise some of the knowledge I’ve recently gathered from my job.
- There is a currently a bifurcation in Internet equities, in which the traditional companies, such as Google, eBay, and Yahoo are valued at lower (and more reasonable) trading multiples than the recent tech IPO stocks. This difference in valuation is somewhat explained by the fact that the younger companies often have higher growth rates, which makes investors more willing to pay a higher price.
- The hot new internet companies have also experienced more volatility, which is often caused by uncertainty. While investors are very excited about new trends such as Social, Mobile, and Cloud, there is little authority on how companies can actually monetize these new capabilities and in turn, generate value for their shareholders.
- Appetite for the shares of the new Internet companies is also driven by the poor macro-economic environment. With the American economy performing so poorly, tech equities are perhaps seen as a safe investor haven to generate returns when other parts of the economy cannot.
I did a quick data pull of IPO issuance volumes over the years and looked specifically at tech issuance as a % of the total. As you can see, we are approaching historical highs in term of proportion of tech IPOs. Interestingly, tech IPO issuance volumes are more volatile than the equities market as a whole. As the chart above shows, tech IPOs took a particularly hard hit in both recent recessions, but have rebounded quickly and significantly. These trends reaffirms my belief that America is still largely looking at technology to drive future economic growth for the country as a whole.