Facebook IPO – Is this the dot.com bubble all over again?

Remember names like Worldcom, Boo.com, Geocities, theglobe.com or Xcelera.com? They were all worth billions of USD in the end of 1999 and then crashed. 

Now the next generation of internet stocks is coming to market, following in the tracks of companies like Groupon and LinkedIn. Facebook is believed to be worth somewhere between USD 50-100 billion! (See Peter Bo Kiaer’s article on Facebook’s valuation.) 

In addition we will see many new stars likely to emerge as the “social revolution” is here to stay, at least for a while. I just stumbled across a rather savvy investor the other the day saying, “Facebook is a fine company with a rather stable business model”.

This really started me thinking; “Gee, I’ve heard that kind of reasoning before regarding young aggressive growth companies within the internet sector”. The bull market was massive and created great gains, just as brutal was the downturn after the peak in early 2000, chart 1.

  You can see signs of the decoupling between the “tech heavy” S&P IT sector index and the Nasdaq Composite vs. the broader benchmark index, S&P 500. Could there be another “Tech craze” in the making?

Facebook is not a dot-com, yet…
Although we are far from the extreme circumstances given in the 1990’s in terms of Facebook, there are multiple concerns to monitor. Valuations are at very conservative levels in the tech intensive indices such as Nasdaq composite, chart 2. This indicates that the broader pick-up in prices has not yet started to happen. The big “jump” in valuation in 2009 is a consequence of falling earnings expectations.


Bubbles are great but handle with care
My point is that all major trends or bubbles have a starting point, that an event sets the pace for something new and exciting and soon investors will follow on mass. Facebook might be that beginning and a grand rally in internet stocks could follow.

Does a grand rally always end in tears?  Not for every company. As we have commented on in a previous theme, some of the main players in that market are still alive and kicking and have very much defined the evolution of the internet technologies within their specific markets. Oracle, Cisco and Intel are still doing fine business.

Are investors smart enough to be able to pick the future players in this round of IPOs?