Tech IPOs: “This Time It’s Different” Chatter Is So 1998

Tech IPOs: “This Time It’s Different” Chatter Is So 1998
3112014 / Pixabay

Just as high profile tech stocks are taking a beating in the market, we’re starting to hear the same incredible claims about how the tech industry is magically different in articles that would feel right at home in 1998. Most recently, Fortune senior editor Dan Primack declared that profits don’t matter when it comes to tech IPOs.

Growth drives IPOs, but without profits those prices decline

“Today’s IPO buyers care about two key metrics: 1. Growth. 2. Total available market, into which that growth can be realized,” he writes.

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On one level Primack is just saying what we’ve all observed. The Twitter Inc (NYSE:TWTR) IPO was the event of the season last year while Castlight Health Inc (NYSE:CSLT) had an impressive 149% pop when it went public this month, though it has been on the steady decline ever since (and with no profits to sustain them neither stock has an actual floor that value investors can rely on). The King Digital Entertainment PLC (NYSE:KING) IPO was a disappointment for the company, but that’s probably because the company’s user base is likely in decline, and there’s a lot of skepticism about its ability to generate another hit on the scale of Candy Crush Saga, not because investors have decided that they care about profits.

Prioritizing growth over value is strategic choice, not one that you’re likely to find championed here, and there’s nothing wrong with pointing out investor preferences. What’s really worrying are the ‘this-time-is-different’ type arguments that always seem to lead down the same road.

Parallels with dotcom bubble are self-evident

Primack is aware of the obvious parallels between the dotcom bubble and today, but he argues that today’s companies have better underlying business models (already debatable) and that they choose not to be profitable because it isn’t in their long-term interest. They could monetize their services if they so chose.

“Many of these tech issuers — particularly the enterprise tech ones — could be profitable if it was somehow required. They’d probably shrivel up and eventually die, but it technically could be done,” writes Primack.

This is a distinction without a difference. If the late 90s dotcom startups couldn’t turn a profit, and today’s tech startups can’t turn a profit and survive, then both are highly speculative stocks. Now we just have to wait to see if the current tech sector tumble is a correction, and that investors have decided to acknowledge that fundamentals matter, or just a temporary pullback.

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