22 Aug 2014
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Let’s Party Like It’s 1999: 'Net Stocks are All the Rage, Again

Irrational exuberance over Internet stocks.

Let’s Party Like It’s 1999: 'Net Stocks are All the Rage, Again

After nearly 30 years in California, most of it in Silicon Valley, I returned to Fairfield County at the beginning of this year — I usually pause at this moment to allow others to question my sanity.

I have learned to take the comments in stride and offer a few laughs at my own expense, but in reality, I had no problem trading the very best the Golden State had to offer for the vibrancy of Stamford and scenery of southern CT. It already feels like home. However, there’s a buzz around the Stamford investment community that is bringing back memories of my time in California with a vintage circa 1999.

Dot-coms are once again the talk of the town and a fresh batch of technology IPOs are going to market with plenty of hype, but with little or no earnings on the books. The IPO shares of professional social network LinkedIn and online radio services provider Pandora were met with tremendous investor demand even though each has failed to show a profit. And these companies are just the opening acts. Groupon and Zynga are two other eagerly anticipated IPOs, and the headliner of the group Facebook — with an estimated valuation above $100 billion — is expected to file later this year. “Investors” are anxiously awaiting the opportunity to place their bets.

"We don’t have a tech bubble,” Peter Thiel, PayPal co-founder, hedge fund manager and early Facebook investor, said. In a recent interview, Thiel suggests that people are still burned out (or just simply burned) from the previous tech bubble and that talk of a new bubble is its own form of hype from doomsayers. Thiel goes on to say that the majority of the attention is centered on Groupon, LinkedIn, Zynga, Facebook and Twitter and “five companies do not make a bubble. If they did, we have bigger problems."

I believe Thiel is partially right. The current number of technology IPOs and the frenzy for everything dot-com is nowhere near what I witnessed at the height of the last technology bubble, but I do recognize evidence of the same speculative mentality from investors and the promotion of “new business model paradigms” to rationalize valuations that bear little resemblance to the reality of the income statement and balance sheet. No matter how new the "paradigm," operating at a loss is not a sustainable business model, and sustainable profitability is still the main driver of shareholder value.   

Investors appear ready, once again, to suspend objective judgment for speculative opportunity. Is Facebook worth its estimated $100 billion valuation? If yes, why? and for how long? Social networking thrives on being “cool," and cool has a short shelf life. It doesn’t seem that long ago that Facebook was the fledgling phenom knocking the previous social networking darling, MySpace, off its pedestal.

Is there a new challenger? Or a shift in tastes, that may make Facebook as irrelevant as MySpace is today? If you think not, ask yourself, whatever happened to Netscape, Webvan and Pets.com? 

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