For investors of a certain vintage, the latest flurry of interest (Pinterest?) in technology flotations has a number of worrying echoes of the dot.com bubble 20 years ago. There have been more initial public offerings (IPOs) of shares in the sector than at any point since the financial crisis and the amount expected to be raised by new issues this year is set to exceed the previous record in 2000 - around $100bn.
There are other similarities beyond the headline numbers too. Back in 1999 the enthusiasm of investors for technology, media and telecoms (TMT) stocks reflected a belief that the internet was a revolutionary technology that was changing the established rules for business and transforming all of our lives. Today, the technology has moved on but the belief in the disruptive potential of smartphone-enabled digital companies is undimmed.
Just like in the late 1990s, many of the highest-profile businesses taking part in this late-cycle gold rush are heavily loss-making. Indeed, the annual deficit reported by online taxi service Lyft in its last year before coming to market was the biggest ever reported by a new issue. That record is expected to be broken very soon by rival Uber when it floats in the near future. Investors are being encouraged to look beyond the short-term red ink by heavily-incentivised investment bankers. So far, so familiar.
For sceptics who feel they have seen this movie before, the performance of Lyft in the early days of its quoted life will ring a few bells. Lyft was priced at $72 a share, jumped to $87 on its first day of trading at the end of March and is now priced at less than $60. The pattern of initial pop followed by quick and panicky reassessment is directionally similar to the early trading seen in lastminute.com, the poster child of the dot.com era.
Lastminute was launched at 380p a share on 14 March 2000 and rose to 511p on the first day of trading. A quarter of a million private investors applied for shares, most of which had been allocated to institutional investors, and they consequently received just 35 each. In due course they were grateful for that miserly allocation because within days the bubble had burst. Two weeks after listing, the shares were trading at 270p. By the middle of April, the shares had fallen to 30% of their listing price.
It is worth pointing out the differences between then and now. History never repeats itself completely even if it does rhyme. Today’s technology flotations are in the main much bigger, and generally more proven businesses than the blue-sky, finger-in-the-air companies coming to market in the late 1990s. The average age of a company staging an IPO is 12 years now rather than four. The hope-and-a-prayer concept stocks with no real business plan are falling by the wayside before troubling the public market. Companies are also less dependent on IPOs to raise money than they were then. Early-stage venture capital money is more readily available.
The internet also feels less of a magical black box than it did 20 years ago when many of us who should have known better chucked in steady jobs to try our luck in the online casino. One or two cashed in, while the rest of us learned some important lessons about things that look too good to be true.
But there is enough that is comparable between the two periods for investors to sit up and notice. One key similarity is the role of the Federal Reserve in this kind of late cycle boom. It is no coincidence that the outlook for IPOs at the end of last year was bleak. With investors worrying that the Fed was determined to normalise monetary policy in the face of a slowing economy, there was little appetite for backing new issues. Six months on, the Fed has staged a dramatic U-turn and markets are risk-on once more. In an environment of lower-for-longer interest rates, investors quickly set off in search of returns wherever they can find them.
Just like in 1999, we have enjoyed a long business cycle. With a robust jobs market and profit margins at historic highs, it is all too easy to forget that nothing goes on forever. The yield curve may not be a good guide to the timing of the next downturn, but it has a near-perfect record of flagging its arrival at some point in the near-ish future.
Other similarities include our willingness to accept versions of the four most dangerous words in investment - ‘it’s different this time’. Twenty years ago, we credulously bought the ‘eyeballs not profits’ story. The new paradigm described by Lyft’s prospectus goes like this: ‘we believe that the world is at the beginning of a shift away from car ownership to Transportation-as-a-Service, or TaaS….Lyft is at the forefront of this massive societal change.’ Newly-coined acronyms to describe revolutionary change are pretty reliable indicators of banker BS in my experience.
Finally, it is worth remembering that pioneers are not always the winners from disruptive change. The money is usually not made by the boffin who invents the change but by the businessman who can deliver it most cost-effectively.
So, what are the lessons for investors from dot.com 2.0? Here are two. First, investors have a fantastic capacity to turn their gaze from what they don’t want to see. As the Lyft prospectus also went on to say: ‘our limited history and our evolving business make it difficult to evaluate our future prospects’. Companies are required to publish risk factors for a reason. Second, a company sells its shares to the public when it considers the environment most favourable - for the seller, not the buyer.
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