What do they have in common? Nothing. It's what sets them apart that is worth noting. Zillow, a real estate site known for aggregating price and tax information on houses for sale, went public yesterday in yet another Tech Bubble 2.0 offering. Although the shares initially tripled (yes, tripled), they fell back a bit and closed up only 79% from the offering price of $20. That gives Zillow a market value of over $600 million for a company with sales of $30 million last year, or 20 time sales. That bears repeating: sales, not profits, were $30 million. There were no profits. Why pay up? Partly because Zillow is a fast-growing company, and investors are always looking for the next Google. May's LinkedIn IPO, and the IPO of Chinese internet-services provider Qihoo 360 are more examples. LinkedIn and Qihoo have sales-to-market-cap ratios of roughly 30 times sales. There are plenty of people who will patiently explain to you why Tech Bubble 2.0 is different from the tech bubble of 10 years ago. Just like people would patiently explain, back in 2006, why buying yet-unbuilt condos in Florida would result in huge profits for flippers.
Technology is an area of great potential and many of these companies will do well. My caveat is simple: price. Let's get back to your prescription. This morning, pharmacy benefits manager Medco announced that they would be acquired by larger rival Express Scripts for $29 billion. That's a price of 1x sales, and less than 20 times earnings - actual profits! I'm not suggesting that Medco is a better company than Zillow or LinkedIn or Qihoo. But I am suggesting that investor behavior, chasing investments based on ideas more than on numbers, can and does lead to bubbles. When Tech Bubble 2.0 bursts, some companies will survive and others will not. Choose carefully.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).