Tech IPOs Reach Values Not Seen Since 2000 Bubble

NEW YORK, NEW YORK - AUGUST 16: People wear protective face masks outside Nasdaq in Times Square as the city continues Phase 4 of re-opening following restrictions imposed to slow the spread of coronavirus on August 16, 2020 in New York City. The fourth phase allows outdoor arts and entertainment, sporting events without fans and media production.

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Technology companies are selling for an average of 23.9 times their last 12 months’ revenue in initial public offerings (IPOs), the highest price-to-sales ratio since the tech bubble of 2000, recent research from a University of Florida professor said.

After seeing ratios of 43 in 1999 and 49.5 in 2000, price-to-sales ratios slumped to single digits between 2002 and 2017, the research showed. But this year’s median price-to-sales ratio is now more than twice what it was in 2018 and 2019, when the market valued tech companies with IPOs at an average of 11.7 and 10.4 times their previous 12 months’ earnings.

“It is looking more and more like 20-21 years ago,” said Jay Ritter, a professor of finance at the University of Florida who researches and tracks the sales-to-price ratios of tech stocks. Ritter provided his research to The Balance. “One difference is that in 1999-2000, the tech companies going public were mainly young and unproven, but with high valuations. Today, they are more established, but with high valuations.”

Despite the 2020 recession and volatile stock market, this year has seen a number of tech IPOs where valuation dwarfed prior earnings. DoorDash, founded in 2013, was valued at $60.2 billion when it made its debut on Dec. 9, despite only claiming $885 million in revenue in 2019, and $1.9 billion through September 2020. Snowflake, a data company founded in 2012, had $264.7 million in revenue for the fiscal year ending Jan. 31, $242 million for the next six months through July, and was valued at $70.26 billion when it went public in September. Palantir Technologies, a software company founded in 2003, had $742.6 million in revenue in 2019, $481.2 million in the first half of 2020, and was valued at $16.4 billion when it went public in September.

The enthusiasm for tech stocks is giving some observers flashbacks to the bubble at the turn of the century, when investors widely speculated on dotcoms and more than doubled the value of the Nasdaq by March, only to see it lose more than half its value by the end of 2000. Ritter isn’t the only economist seeing this history potentially repeating itself.

“I am afraid the market is wearing rose-colored glasses,” Campbell Harvey, a Duke University professor who is known for pioneering the use of “yield curves” to predict recessions, wrote in a LinkedIn post earlier this month. “Many young investors don’t remember what happened 20 yrs ago when the tech bubble burst.”

Indeed, Ritter sees some of the same market conditions of the late 1990s, as growth has outperformed value for several years now. “Investors might be chasing past returns,” he said. 

Economists have noted the “frothy optimism” of investors, and many are wondering if the Nasdaq could be headed for another downward spiral, such as the one that followed its March 2000 high point.

But not everyone agrees that a tech bubble redux is imminent. While company valuations are currently “elevated,” they have a long way to go before reaching the excessive levels of the first tech bubble, according to an analysis by researchers at George Mason University (GMU). Concerns of a new tech bubble are “overblown” and warnings about it are “safe to ignore,” according to the analysis by GMU business professor Derek Horstmeyer and student Chaitanaya M. Vij.

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  1. Warrington College of Business, University of Florida. "Initial Public Offerings: Updated Statistics."

  2. YCharts. "DoorDash Market Cap."

  3. Securities and Exchange Commission. "Form S-1: DoorDash."

  4. Securities and Exchange Commission. "Form S-1: Snowflake."

  5. YCharts. "Snowflake Market Cap."

  6. Securities and Exchange Commission. "Form S-1: Palantir Technologies."

  7. YCharts. "Palantir Technologies Market Cap."

  8. Yahoo Finance. "Nasdaq Composite (^IXIC)."

  9. LinkedIn. "Campbell Harvey, LinkedIn Post."

  10. Charles Schwab. "2021 U.S. Market Outlook: Better Days?"

  11. CFA Institute. "Dot-Com Redux: Is This Tech “Bubble” Different?"

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