Here’s the only difference between this current Internet bubble and the last Internet bubble: The current Internet bubble is much bigger and it’s just getting started! A fair estimate is that the current bubble will be, or is already, at least 10X bigger than the previous Internet bubble. I’ll get to the implications for investors from this unprecedented new equity bubble, in future posts. But for now, here are some of the basic facts.
When Amazon.com went public back in May 1997, the company’s post-IPO valuation was a measly $440 million (Reference). Yahoo! went public at around a $1 billion valuation (Reference). Ebay, which went public in September 1998, had a valuation of nearly $2 billion on the day of offering (Reference).
In terms of current Internet bubble, here are a view reference points. LinkedIn (LNKD) recently went public and now sports an $8.5 billion market cap! That’s 20X Amazon.com’s IPO valuation. Demand Media (DMD) has a post-IPO valuation of $1 billion. And now for the real bubbles: Zynga is projected to have an IPO valuation of up to $20 billion. Groupon is also claiming a $20 billion IPO valuation. Living Social, a Groupon copy cat, is planning a $10 billion to $15 billion IPO.
A quick questions: Is the potential business opportunity over the next decade of, for example, Living Social, really 20X greater than the potential business opportunity Amazon.com encountered 14 years ago?
And in terms of capitalization: just using some conservative estimate of the amount of potential IPO’s (using SharesPost.com), and the future valuation of these companies (using comps), would yield an unprecedented capitalization of current Internet companies as a either a percentage of US GDP, US technology companies in general, or even the entire Internet economy. How does the total capitalization of these new Internet companies compare to the potential profit contribution of these companies in the US economy?
These are two interesting questions to consider. But for now, it pays to remember that finance is always about the future, not current reality. Therefore, anything is theoretically possible and justifiable in the world of finance, since it is our imagination which determines the future.
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Here’s an interesting stat:
According to Jay Ritter, a finance professor at the University of Florida who researches the IPO market, there were 115 IPOs in calendar 1999. In the first quarter of 2000, there were 48 more — a pace equivalent to 192 a year.
But, since as I’ve pointed out, the Internet IPO’s today are being valued at roughly 10X to 20X the valuations during the first bubble, it should be clear that in terms of valuation, we really only need about 10 to 20 IPO’s this year to reach the peak of the last bubble in terms of market value. My guess is that we’ll get there easily, since Facebook alone is worth 100 IPO’s from the last bubble.
My expectation is for this current Internet bubble to be very compressed in nature, just due to the fact that “things” move much faster nowadays, and also because of the insane market caps of the new crop of Internet companies. I’d venture to guess that the new Internet bubble will pop in about 12 months, still plenty of time to make some money.