We are in dotcom boom 3. I don’t mean this is a sarcastic way I mean that the third generation of dot com floats of significance is in progress.
The first wave was in the nineties with the like of Amazon and other long term darlings taking to the stock market seas. They went from hero to zero and back again. At least survivors did.
Then came the Google to Facebook period of a decade of second generation giants coming to market.
Now we are in the third wave from Twitter onwards.
Without doubt there are winners and losers in every wave. There are also low profile internet companies that IPO and never get on the radar.
The companies we care about however are brands of global significance.
These are the picks that can deliver the big returns over the long haul.
This is why I have recently bought Paypal and Match.
IPO’s are dangerous because often they are priced to gouge the retail IPO flipping wannabes. Big high profile IPOs can be simply the distribution phase for the insiders cashing out at the cost of the outsiders. No one should play in an IPO that is overpriced. If you can’t see the greater fool, it is likely to be you.
While people think IPOs are all about catching a first day pop, they should be all about valuation.
Valuation is where it starts to get tricky.
Right now the value investment theme is on the back burner. Value investments are underperforming for now. What is working in this market is special opportunities. IPOs are a sort of special opportunities but classically ‘special sits' is about good companies getting in bad situations. Those bad ‘black swans’ offer special opportunities to make nice returns.
For example I have picked up Rolls Royce recently in the pit of their corporate despair and that’s working out well. I have written here about Volkswagen and Porsche which is a perfect example of a special situation. They are all panning out in a way to suggest ‘special situations’ is a good place to be right now.
When you look at the valuations of these kind of companies, all internet businesses seem ludicrously highly valued.
Rolls Royce makes some of the most advanced technology on earth, it is one of three companies that power the whole airline industry and therefore by default a fat slug of the whole global tourist industry, yet is worth roughly the same as Expedia (which I own too) which simply aggregates the booking of holidays and flights.
It is true that the little rider on the elephant gets all the glory and the elephant gets the chain around the ankle, the sharp poke behind the ear and a big log to pull but it is still sobering to think that Rolls Royce is worth about the same as Expedia while having four times the sales and a bit more than a database and some servers. (OK I’m being mean, but you get the point.)
Let’s not fight it. When you start looking at tech darlings and begin to do comparatives, the results are just dreamlike. Yes Apple is worth about $100 for every person on the planet, or lets call it $2500 per American family. Fun with numbers on these valuations can be endless. I give up on that reality, at least for now.
Instead we are forced to look to the past and embrace this kind of valuation and look to pick out a future Google, Amazon and Netflix etc.
On the stock market Olympus of the tech-darlings valuation is all about consumer brand, platforms and dominance. Then there is the relative price.
You should be able to compare rolls Royce with Netflix but you may as well forget it and compare instead like for like.
Both Paypal and Match have giant consumer brands and Match, king of many peoples love life, has the sensational tinder product to propel it into the future. These IPO valuations have been relatively modest too. Both companies are platforms and they are both the ‘kings of the hill’ when it comes to their markets.
Internet companies ride along bumpy roads when it comes to price action but the name of the game is to call a winner after IPO, then buy the stock and try and forget it.
Match and Paypal are perfect examples of such opportunities and in these days of horribly overpriced IPO’s it is good to see some value at day 1 from these companies which are both spinoffs rather than VC creatures.
As anyone who follows me will note. I’ve picked up a few internet takeovers on these pages. I don’t like investing in expensive companies, they really aren’t my preferred investment date, but they keep being very nice to me, they keep flattering my judgment. So what is an investor to do but go ugly early?