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 Market strategists and tech experts say the comparison is overblown.
While there is the potential for a decline in some Web company stock
prices that are out of line with their earnings outlook, they say
there is little chance of a bloody retreat.
Most importantly, this year's stars, such as Facebook and Netflix,
actually make money. Many of the web companies that were emblems of
the previous era had little prospect of ever being profitable and
some hardly had any revenue — basing their boasting on non-financial
metrics such as numbers of eyeballs, or page clicks.
The Internet and the ways people use and access it have been
transformed in the past 14 years. In 1999, it was mainly through
slow dial-up services using a desktop computer, now there is faster
broadband and mobile access from phones and tablets. Web-based
advertising has grown into a mature, viable business, and computing
speeds support video and sophisticated gaming.
The market is much more rational than it was in 1999, argues Jeff
Dachis, who co-founded and was chief executive of Razorfish, an
online ad firm that went public in 1999, and is now part of France's
Publicis Groupe.
"What you had then was 100 times the volume of stock with little to
none of the credibility or weight in the marketplace that a Facebook
or a Twitter has today," said Dachis. "Nobody denies now the growth
of online advertising or digital marketing."
WARNING SIGNS
Facebook, Google and Netflix are among the internet companies set to
finish 2013 at or near record highs. Less-weighty Web companies such
as Yelp and Pandora saw their shares triple.
That is not to say there aren't warning signs. The 160-percent gain
in shares of Twitter since its November initial public offering
raises awkward questions about the levels of speculative froth given
the company has not yet earned a cent.
Also, consumer names like Snapchat and Pinterest are raising
eyebrows by garnering millions of dollars in financing at
multi-billion dollar valuations — despite being decidedly in the
red.
According to CB Insights, there are 26 U.S. tech companies that have
raised financing at valuations of $1 billion or more and that could
go public in 2014, including Uber and Square.
Hedge fund manager David Einhorn, who has often taken short
positions on richly valued stocks, in October asked in a letter to
investors whether history was being repeated. "When ... conventional
valuation methods no longer apply for many stocks, we can't help but
feel a sense of déjà vu," he said.
Still, internet companies are trading at much cheaper valuations
than their counterparts in the late 1990s. The stratospheric
multiples that defined companies such as Webvan (388 times revenue
in 1999) and VerticalNet (268 times sales) are unheard of today.
Twitter, which trades at 73 times its past year's revenue, is among
the most richly valued Web stocks by that measure. Google, Netflix
and Salesforce.com all trade at below 10 times their trailing
twelve-months' revenue.
"The end markets — internet advertising, online retail, online
travel — those markets are just dramatically more developed today
than they were in ‘99, 2000," said Mark Mahaney, who began his
career covering internet stocks in the 1990s at Morgan Stanley,
working with star internet analyst Mary Meeker.
TOIL AND TROUBLE
The bursting of the dotcom bubble ranks among investment history's
greatest debacles. From its peak of 5123.52 on March 10, 2000, the
Nasdaq Composite Index lost 78 percent of its value in just over
two-and-a-half years.
Nearly 14 years later, the Nasdaq has still not regained those lofty
levels even as most other major U.S. averages have surpassed
previous highs, another indication that the market is far from where
it was back then.
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The turn of the decade came replete with stories about extravagant
parties, unabashed flogging of dubious names by investment
professionals and startup CEOs, and tales of cash outlays that
boggle the mind today, including a Super Bowl 2000 that saw nearly
20 dotcom companies spending about $1.1 million apiece on
advertising spots — just before many went under.
At the end of 1999, 8 out of 10 of the most highly valued stocks
were tech companies, led by Yahoo trading at almost 577 times
projected 2000 earnings, according to S&P Dow Jones Indices. Fellow
dotcom-era corporations America Online and Cisco Systems Inc — the
latter prized because it dominated the market for networking
equipment that enabled internet connections — clocked in at 223
times and 102 times, respectively.
Fast-forward to 2013, and just four dotcoms rank among the year's 20
biggest gainers on the S&P 500, led by Netflix's quadrupling. Yahoo
is at No. 10 after having doubled. Facebook has more than doubled.
Other big gainers include Best Buy and Micron Technology.
"The consensus view in the market is that things are bubbly but
since the valuations are not as expensive as 1999, there is room to
run," said Mike O'Rourke, chief market strategist at Jones Trading.
But he said such thinking may be flawed and cautioned that using one
of the most expensive periods in stock market history as a
comparison is extremely risky, with a limited reward. "When bubbles
pop a large portion of the gains are erased very quickly," O'Rourke
said.
IPOS MUCH FEWER
The lack of newly listed internet stocks provides some relief for
those concerned about a possible bubble.
There were only five U.S. internet IPOs in 2013, including Twitter,
compared with 86 in 1999, according to Thomson Reuters data. In
fact, the number of IPOs in 1999 is greater than the combined number
of public offerings every year since then.
Many companies may simply be waiting longer to take the plunge,
debuting at a far more advanced stage of development than the wave
of 1999 dotcoms. Facebook, an extreme example, went public with a
valuation of more than $100 billion.
"Anything and everything — regardless of how asinine the business
model was — was going public and getting ridiculous valuations" back
in 1999, said Ryan Jacob, chief executive of the Jacob Funds.
Take eToys, the online toy store whose shares quadrupled on their
debut in 1999. It spent tens of millions of dollars on pricey TV ads
only to file for bankruptcy in early 2001.
With low interest rates and signs that the U.S. economy is
strengthening, internet valuations could go higher in 2014 — though
nowhere close to 1999 levels, Jacob says.
He points to LinkedIn's 14 percent decline since more than doubling
in the first nine months of the year, as sign that investors aren't
losing their heads. "You did have a part of the market that got
ahead of themselves, and then took a breather" in 2013, Jacob said.
(Editing by Edwin Chan, David Gaffen and
Tim Dobbyn)
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