Yellow Flag for the IPO Hoopla

 | Apr 04, 2014 | 11:39 AM EDT  | Comments
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Today, when I found my arms wrapped around a slice of pepperoni pizza and a piece of salmon on the Floor of the New York Stock Exchange, I said to myself, "If this isn't what a top looks like, then I don't know what does."

Yep, today we got an initial public offering for GrubHub (GRUB), a well-loved food-delivery service, and, as it went to a scorching premium that was well above the range of the initial price talk, I was just plain worried.

You see, I vowed in 2000 that if we ever again saw a parade of endless IPOs, I would speak up and say this is all too much and we can't have this much supply of this many companies and expect the market won't get hammered.

I write that because I lived through it. I helped bring TheStreet.com public back in 1999 and, like GrubHub, the IPO, which was priced at $19, opened up at $63 and went to $67 and then ultimately fell to $1 not that long after. I console myself by saying at least it didn't disappear like 300 deals that came through that period, the vast majority of which looked just like TheStreet with no earnings and no prospects for earnings in the near future because the opportunity was too great to make a profit.

Or at least that was the rationale the bankers gave for what was transpiring back then.

I vowed that I would speak up because, unlike, say, high-frequency trading, which causes people to lose pennies per share, the seemingly infinite supply of companies devoted to using the Internet to make businesses and services better could cause people to lose dollars per share that could be meaningful to their life savings.

We have had not one, but two serious assaults on the stock market this millennium. The second, the near-collapse of the financial system itself, should have been stopped by the clueless regulators well before it got out of hand. But the first was just about greed. Companies took advantage of the fervor for dot-coms that, in retrospect, was totally a bubble of insane dimensions, and I want to try to prick that bubble this time around as best as I can.

Now, fortunately for investors there are flaws in both the analogy and the logic of the comparison of the two eras of 2000 and now. The analogy doesn't hold up to close scrutiny because, unlike 2000, many of these companies, including GrubHub, are real. In fact, GrubHub's immensely profitable and is in rapid-growth mode. It's just that in the $30s, where it opened, it is wildly expensive, selling at 60x 2015 earnings, which I find to be a fanciful valuation for a take-out food delivery company, even one that's growing at 30%, processed $1.3 billion in gross sales and has a 60% share of the electronic ordering market, according to Renaissance capital, the IPO research company. Still, that's very different from 2000.

Second, there are whole other parts of the non-IPO market, including the Nasdaq, that are very cheap on 2015 earnings. That sure wasn't the case in 2000, where all of tech was inflated.

Now, for every GrubHub or IMS Health (IMS), another very profitable company that came public today, there are companies like Opower (OPWR) or Five9 (FIVN) that also IPO'd and are, to me at least, more emblematic of the moment. The first is an unprofitable company that provides software to the utility industry. The latter is money-losing cloud-based call center.

That's per se worrisome.

Plus, the hoopla around all of these deals, including a dancing chicken Caesar wrap that I bumped into on the floor, unavoidably raises eyebrows, especially after King Digital (KING), another company with dressed up characters that came public last week, laid an egg.

So, I am simply doing my duty, reminding people of what happened 14 years ago while apprising you of the current environment's similarities, just as I always swore I would do if I saw a potential repeat of a bygone era that lost people trillions of dollars in life savings and wrecked the stock market as a source of wealth for tens of millions of people. Let's say it's a yellow flag, but one that, like the street lights, inevitably turns red unless the market wisely pulls the plug on the whole IPO love affair.

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