With Facebook's $100 billion initial public offering (IPO) coming up later this year, many people are asking: Are we living in another tech bubble?
Although there have other companies with frothy IPO valuations such as LinkedIn (LNKD) at $9 billion and Groupon (GRPN) at $11 billion, I would say that those companies are the exceptions and not the rule.
We are definitely not yet in a tech bubble. Here's why:
- The P/E ratios on average are much lower today. As of today, the trailing P/E ratio for the Nasdaq 100 is 11.63. This is down from 13.78 a year ago. At some points in 1999, that ratio was above 100. That means Apple (AAPL) would have to be trading today with a $5 trillion market cap to equal the market multiple average in the dot-com bubble.
- The market is still well below the highs of the spring 2000. Back then, the Nasdaq peaked out above 5000. Today, we're excited because we're close to passing 3000 – for the first time since November 2000.
- The capital raised from tech IPOs is a trickle compared to the bubble years. U.S. tech IPOs raised $8 billion in 2011. In 1999, 289 U.S. tech IPOs raised $24.66 billion. In 2012 dollars, that represents $33.55 billion, which is 4x what was raised last year.
- The tech window shut for 12 years before recently opening a crack. The IPO window only slightly opened last year for tech companies. It seemed like a flood. However, it's easy to forget that the window had been shut for 11 years before that.
- Most of the big tech IPOs last year are "broken" -- trading below their first trading price. Demand Media DMD is down 65%. Zipcar (ZIP) is down 53%. RenRen (RENN) is down 70%. Boingo Wireless (WIFI) is down 20%. Yandex (YNDX) is down 43%. Pandora (P) is down 27%. Zillow (Z) is down 12%. HomeAway (AWAY)is down 35%. Skullcandy (SKUL) is down 29%. Tudou (TUDO) is down 37%. GRPN is down 24%. Angie's List (ANGI) is down 2%. By the way, in the last year, the Nasdaq is up 7.4%. In 1999, IPO companies ended the year 266% above their offer price.
- Back then, we saw irrational exuberance in spades. In 1999, IPO companies ended the year 266% above their offer price. The average 1999 IPO closed on its opening day 90% above its offer price.
- We are not seeing have unprofitable companies coming public. Back in the day, we had eToys, Webvan, Pets.com, Broadcast.com, TheGlobe.com, and Drkoop.com. We just don't have that type of silliness in the public markets today.
- Venture Investors are much more conservative today than they were then. In 2011, 3,673 venture investments, worth $28.4 billion for an average of $7.7 million per deal were made. In 2000, there were 5,485 venture deals made worth $89.8 billion or $118 billion in today's dollars – or a quarter of the boom times. The per-deal average in 2000 was $16.4 million or $21.6 million in today's dollars – or a third of the boom times.