The recent slew of tech-based IPOs has raised questions about whether we are back in a technology bubble like the one we saw in the late '90s and early 2000s. After all, recent debuts from LinkedIn and Renren, and a brewing ones from Yandex - Russia's equivalent to Google - and Facebook are reminiscent of a time when traders were putting ideas and concepts ahead of earnings and valuations.
Before falling into the same "conceptual investing" trap, let's do what so may others haven't yet - stop and actually crunch some numbers. (For background reading, check out Why Social Media Isn't Like The Dotcom Bubble.)
TUTORIAL: The Industry Handbook: The Internet Industry
Tech IPOs by the Numbers
With an IPO, you have to look at where the company is likely to go rather than where it is in terms of foreseeable sales and profits. On the other hand, investors have to be realistic about whether some of these companies can ever generate enough income or revenue to justify their stock's price.
Take LinkedIn (NYSE:LNKD) for instance. Its web property has been placed into the social networking category, although most people know it's more of an online business card and contact-making venue. Slightly fewer recognize that the company went public about a week ago with a market cap of $8 billion, which has since become $8.3 billion. Very few realize that the company generated $243 million on sales and $15.4 million in income last year. That translates into a price/sales ratio of about 34.1, and a price/earnings ratio of about 539.
To be fair, the company has been growing both numbers like crazy. In 2007, sales were only at $32 million, and LinkedIn only netted $330,000 in profits. Still, how long can the company continue to grow at that pace now that it's saturated with reportedly more than 100 million users?
Get the picture? The easy growth period for LinkedIn is winding down, and the stock's still trading at 539 times its income and 34 times sales. It's going to take 10-20 times the business it's doing now to justify that valuation by bringing it in line with its peers.
It's not just LinkedIn though. China's social networking site operator Renren (NYSE:RENN) is currently worth $5.1 billion on $76 million in revenue for 2010. Quarterly net income has been seen every now and then, but more often than not, the company still loses money. A price/earnings ratio wouldn't be fair to apply, but the price/sales ratio is a fairly frothy 67.1.
Yandex (Nasdaq:YNDX) now boasts a market cap of $11.1 billion versus $440 million in revenue in 2010, $137 million in revenue for Q1, and a profit of $29 million. Even generously annualizing last quarter's numbers, you come up with a price/sales ratio of 20.2, and a price/earnings ratio of 95.7.
Anything Can Happen, But...
Compared to Google's (Nasdaq:GOOG) trailing 12-month price/sales figure of 5.4 and trailing price/earnings multiple of 20, it just doesn't seem possible that any of these companies' stocks are anywhere near where they should be. Yandex is the closest, and it's still about four times overvalued relative to Google's numbers. As was said before though, investors own companies for where they're going rather than where they've been, and we've seen tech companies grow like crazy before.
Google was one of them. In 2001, Google's annual revenues were a mere $86.4 million. In 2010, sales reached $29.3 billion - more than 300 times its sales from nine years earlier.
China's search engine Baidu.com's (Nasdaq:BIDU) story is a similar one. The company's top line more than quadrupled between 2007 and 2010, and profits improved nearly six-fold during that time.
Anything can happen in the business world, but there is one major flaw in comparing today's LinkedIn and Yandex to Google and Baidu and that's market share.
Lack of Upside in Yandex and LinkedIn?
In 1999, Google owned less than 1% of the search engine market, meaning there was massive room for growth. In 2004, Baidu.com only owned 33% of China's search engine market, leaving lots of market-penetration opportunity on the table.
Fast forward to today, where Yandex already owns more than 60% of its target market's search traffic, and where LinkedIn already has more than 100 million users. That doesn't leave much room for the kind of growth phase that Google and Baidu had when they went public.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
Stock AnalysisExamine the current state of the economy of Brazil, and learn why there may be some reasons for investors to look for a rally in Brazilian stocks.
Stock AnalysisWynn Resorts has experienced a rally recently. Will it remain a good bet?
Stock AnalysisThe bulls won for a bit in early October, but will bears have the last laugh?
Stock AnalysisTwitter is an enigma to many investors, but its story is pretty straightforward.
Investing BasicsInvestors benefit when company research incorporates seasonality trends that predict relative strength and weakness throughout the calendar year.
Stock AnalysisIf you're seeking modest appreciation, generous dividend payments and resiliency, consider these eight utility stocks.
Stock AnalysisHere's why Phillips 66 will likely remain one of the world’s largest and most profitable companies for a long time to come.
Stock AnalysisStuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
EconomicsEmerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
Stock AnalysisPepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. ... Read Full Answer >>
Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>