Are we going dotcom dotty all over again?
As another online retailer comes to market, Julian Knight asks the experts if this is back to a 1999-style bubble or whether cash is now counted as more important than a company's clicks
Thursday 13 March 2014
History does have a habit of repeating itself, but surely not as fast as this.
Barely 15 years ago the FTSE 100 was nearing a record high of 6,996 and internet companies were falling over themselves to come to market. But the signs were there of an impending market collapse. In the UK, at least, this became embodied by the implosion of the online retailer boo.com, which managed to burn through more than £100m in investor capital in a few short months despite turning over less than a medium-sized country pub. When boo.com went, it heralded a market crash.
Tomorrow a certain boohoo.com, another online fashion retailer, comes to the Aim market. And although boohoo.com is a much sounder prospect than its unconnected predecessor, its IPO right now, when the market is pushing back towards 7,000 and following a host of oversubscribed dotcom IPOs, is reminiscent of 1999.
Take the recent float of the online white goods retailer AO, which had more than a whiff of dotcom mania about it. Overnight AO achieved a market cap close to that of Dixons, which enjoys a turnover nearly 40 times its size.
A few days before, in the US, Facebook unveiled a $16bn (£9.6bn) takeover of WhatsApp, a middle-sized instant messaging service.
The Candy Crush Saga games group King yesterday unveiled plans for a US flotation that could value it at more than $7bn, not far off the veteran games group Electronic Arts. Even sober commentators are starting to question why are investors partying like it's 1999 again, or is there something fundamentally different this time around?
For Patrick Connelly from Chase de Vere there are similarities between the recent surge in share prices and the dotcom boom: "As the FTSE 100 approaches 7,000 it certainly makes people question whether we are in a bubble. There are some similarities with the stock market boom of 1999 in that shares are being pushed higher by sentiment rather than fundamentals.
"Many stocks are now looking expensive, and unless earnings improve to justify these valuations, there is a real danger that we could suffer a market correction."
So any rise above the symbolic 7,000 may be shortlived, but Mr Connelly says there are some key differences this time: "The most expensive stocks today are quality businesses with good earnings and making consistent profits. In 1999 many of the most bought stocks were start-up businesses with no real infrastructure and which had never made a profit. These are not flash-in-the pan dotcoms."
How internet company shares are priced up has altered a lot since 1999. Expertise in the City is greater when it comes to understanding the peculiarities of companies with a strong internet presence.
Juliet Schooling Latter at Chelsea Financial Services said: "Back in the day, internet companies were being priced on the number of clicks rather than earnings. Now things are much more sophisticated.
"Take the Facebook IPO, for instance. It faltered due to many professional investors not being able to see clearly where revenues would come from, and it was only once this was clearer (about a year later) that they chose to take a holding. Twitter was expensive with no visibility of earnings and WhatsApp has just been bought for a huge amount of money, but still with the same issue."
Outside the social media sector, Ms Schooling Latter says there is still value: "The technology sector is much more varied than it was in 1999 and the bigger stalwarts are not expensive. Indeed the sector as a whole is still relatively cheap."
Another crucial difference is a notable absence of small investors buying into internet companies. In 1999 a culture of day-trading sprang up around the surge in dotcom share values, and investment funds such as Aberdeen Technology had such huge flows of capital that managers admitted they couldn't buy enough stocks. One apocryphal story about this crazed time was one fund manager hiring a helicopter to carry last-minute Individual Savings Account applications from Canary Wharf to their head office for processing.
No fund manager would dream of doing anything so showy now. Adrian Lowcock, an investment manager at Hargreaves Lansdown, said: "Shares are nowhere near as popular now as they were back then. Back in the dotcom boom I remember being offered share tips by my cab driver. Now private individuals are obsessed with property."
He concludes that despite the huge valuations of AO and the likes of Twitter and Facebook "markets have come a long way, but we are still nowhere near levels of irrationality or over-exuberance which drives bubbles."
But David Kuo, investment director of the Motley Fool website, says: "'This time is different' are probably the four most dangerous words in investing. When you buy an asset that is valued at 200 times annual profit, you are effectively saying that I will make back my money in 200 years. That requires not just a massive leap of faith but a giant leap into the dark."
Float facts: How the shares fared
Cheap light bulbs and chocolates won out over hamsters and terrapins yesterday, as Poundland shares made a sparkling debut on the stock market but those in Pets at Home fell sharply.
Poundland shares were priced at 300p, or three times the price of everything on offer in its 500-plus high-street shops. They raced up 70p to 370p, valuing the business at £925m.
By contrast, Pets at Home's shares, which were priced at 245p in the offer to institutions, staff and retail investors, fell by 7p to 238p, valuing the 369-strong store chain at £1.2bn.
Poundland raised no new money through its offer, with the private equity firm Warburg Pincus collecting the bulk of the £375m made. Following the float Warburg Pincus will own just over 30 per cent of the shares and management 10.2 per cent.
Pets at Home raised £280m of new cash. Its major shareholder, the private equity giant KKR, and other existing investors collected £210m from the sale.
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