"The only thing we learn from history - is that we never learn from history." This great maxim accurately explains the insanity reflected in some tech stocks and companies masquerading within that genre. It is reminiscent of the late 1990s. Those were the days of $200 billion+ Yahoo and AOL evaluations (before ever turning a profit) and IPOs of some of the most preposterous business plans ever conceived.
I'm not referring to Apple's (AAPL) current valuation of $630 billion. I'm referring to companies like Angie's List (ANGI) at $600 million. Any value investor can tell you after a glance at these two companies that Angie's List is far more expensive at almost $600 million than Apple is - at nearly a trillion. That is because "expensive" is a function of value. Apple looks fairly priced here based upon assets, cash flow, earnings, patents held, diversified business model and legitimate prospects for future growth.
If a comparison between Apple and Angie's List seems ridiculous to the reader - you may have a propensity for logic and basic sense. Absurd as it is, the assumption that Angie's List is somehow a "tech stock" is made all over the financial media. Following is a sample of one day's headlines taken from one major financial website after seeking a quote on ANGI:
Angie's List falls on downgrade
10:00 a.m. Today
- Dan Gallagher
Yelp, Angie's List stand out in tech action
4:29 p.m. Aug. 29, 2012
- Rex Crum
Yelp, Angie's List among early tech gainers
9:52 a.m. Aug. 29, 2012
- Rex Crum
Groupon, Angie's List plunge as techs slump
5:46 p.m. Aug. 14, 2012
- Benjamin Pimentel
Angie's List is a website that allows consumers to write reviews on companies whose services they have used - in order that others looking for those services may read the reviews of those companies ostensibly to help and protect them.
Consumer reports written by consumers on a website is a convenient option, but I do not see how that makes them a "tech company." Anyone could replicate this by creating a website or publishing a magazine. This is a very basic concept with no barrier to entry as far as my mind can conceive - unless you consider procuring advertising dollars a significant barrier to entry. Where does the "tech" come into play?
I remember back in the 90's Internet bubble, every company wanted to be a tech company. One of the many ludicrous stories I recall that demonstrated the end was near was a true story involving an old company called Zapata Corporation. Zapata was started in 1953 by George H.W. Bush and a few partners long before his political career. They had some offshore "wild catting" business and another segment was dedicated to harvesting fish of some sort for their oil.
Nevertheless, when the bubble was near the pinnacle, Zapata suddenly announced that it was becoming an Internet technology company. They changed their company name to Zap Corporation and the symbol to ZAP. The press release claimed they were going to publish websites, which suddenly made them an Internet technology company.
I don't know how much of a pop their stock took from that strategy, but I do remember how hard my abs were aching from laughter after I read that press release.
But the point of course is that now, like then, many in this market are all too willing to go along with the consensus that companies like Angie's List, because they have websites - are somehow technology companies, thereby warranting quadruple the multiples to sales afforded even to legitimate tech companies.
I have nothing against Angie or her list. I just do not see them becoming profitable enough to warrant such attention. Despite the fact that they are bleeding red and all of their ratios begin with a minus symbol, hey, maybe someday this very basic service will be profitable. They have close to 1 million subscribers now, but there are only so many people as a percentage of the population who subscribe to services of this nature. They are probably much closer to an end of the limited supply of people who are willing to pay for this type of service than they are to the beginning.
Why is this company Public?
Ideally as an investor, I would be amenable to participating in an IPO if there were substantial growth prospects for the company and the proceeds from the IPO would aid the company by funding their expansion. I cannot for the life of me understand why this company is even public.
Are we to believe Angie had to go to Wall Street to raise money for a few new servers or to buy some TV commercials? That was the stated reason back when they filed for the IPO; but if they can't buy commercials with the revenue from their current subscribers, I fail to see how this company is worth more than $100 million and that is pushing it. This isn't a future Apple, McDonald's (MCD) or Wal-Mart (WMT) needing loads of cash for expedited acquisition of real estate, factories or R&D. I suspect this IPO probably happened because some VC funds and/or Angie wanted an exit strategy.
That is the problem investors have been facing with small companies like this and more widely utilized companies like Facebook (FB). VC funds want to cash out at substantial premiums and Wall Street investment banks like Bank of America/Merrill Lynch (BAC), Morgan Stanley (MS) and Goldman Sachs (GS) are all willing to help feed the frenzy - despite the fact that hyping these stocks is hurting their own retail and institutional clients.
The mentality has been that companies should be sold for the absolute -highest- price they can get. The problem is that ethics seem to be non-existent. A company's IPO price should not be set at whatever price to which they can hype the shares on these road shows and via press release. The IPO price should be set at what the investment banker legitimately determines is a - fair and reasonable- price. The investment banker has two clients in these deals. So in reality, these firms do have a vested interest to strike a fair price, especially since they are selling the shares to their own clients.
For some reason, these firms do not seem to respect their retail clients. They seem to think their retail customers are foolish enough to keep coming back to their brokers indefinitely. From what we see happening in some of these stock valuations, you have to wonder where they continue to find these people because as in the case of the aforementioned IPOs, they often ended up raising more than they were initially seeking in these deals.
While chastising Wall Street, I feel it is important to note that the answer to the problem of greedy investment bankers is not more regulations by avaricious politicians. It should never be within the authority of elected ambulance chasers to determine what is a "fair and reasonable" price for an IPO. Their cures are consistently worse than the actual disease. The market will correct this problem once the shares of these investment banks are completely decimated and these bankers are held accountable to their own shareholders.
These investment banks are in danger of killing the IPO market (and VC market) for many years to come by the apparent chicanery they employ. When the notion that "one should never buy shares in a new issue until six months after the IPO" becomes an axiom - we have a problem. Pardon me for being obvious, but somebody has to have enough faith to buy in the primary for there to exist a secondary. It could take decades to regain trust in the markets if they continue pricing these deals as though they are commodities - worth whatever amount suckers can be made willing to pay.
While you are waiting for investment bankers to become more ethical, here's some basic advice. Before participating in an IPO, make sure you can answer the question - why is this company going public? The fact that founder Mark Zuckerberg did everything he could do within the law to remain public should demonstrate that they really were not hurting for cash and raised at least one red flag. Facebook didn't need the money to fund expansion; the VC funds were looking for the big payday. Despite the fact that Zuckerberg made billions on the IPO - he may deserve some credit for resisting the IPO and roadshow.
Unlike Angie's List, I wouldn't consider Facebook a "tech imposter" as they do have unique web applications essential to the service they provide. Based upon the frequent comparisons we heard justifying the high initial price, I would consider Facebook more of a - Google imposter.
It is great to be able to participate in the equity of exciting new companies. It would be overly simplistic to say that all companies should only go public if they need the money for the purpose of expansion. However, as a starting point, it is a good idea to understand -why- the owner is selling even when buying a used car. After that question is answered, make sure the company actually is in essence what they are being purported to be by the carnival barkers of Wall Street.