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The internet IPO needs to make a comeback

An IPO (initial public offering) can be a lucerative way for companies to rise a lot of money, as well provide an ‘exit’ plan for the founders and early employees. IPOs also allow individual retail investors like you and me to partake in the company success (or possible failure) by purchasing ‘overnership’ of the company in the form of shares. If the company does well, the shares should rise and you, the investor, make money. In the 90’s stock market boom dotcoms strived to go public. Now with the rise of web 2.0 and social networking we’re in a second internet boom, but there are no web 2.0 IPOs. Not a single one.

There are many reasons why there havn’t been any web 2.0 IPOs. During the last dotcom boom retail investors and venture capitalists lost billions of dollars from investing dotcoms. Mopt of the dot coms that went public between 1997-and 2000 lacked a sustainbale business model and were hemorrhaging money. Even successfull IPOs such as amazon.com and yahoo.com drained investors when the dotcom bubble burst. In addtion, the SEC has imposed various new regulations since 2000 such as Sarbox Oxley which makes it more difficult for companies to go public, as well as requires more stringent financial statement reporting in the wake of the Enron and Worldcom scandals.

But if you look beyond the negatives IPOs offer a lot of benefits, and now may be the best time for web 2.0 companies to go public. Unlike the previous internet boom, the majority of web 2.0 companies are profitable and are experiencing rapid growth. The potential is abolutely huge, especially considering the enourmous hype surrounding web 2.0 companies.

If facebook went public it could easily attain a market capitalization of 30 billion or more within a month, exceeding that of Yahoo.com. Infact, I would buy as many shares as possible of facebook if it public without even giving it a second thought because the potential is so great. Sure, this may seem like financial suicide, but actually it isn’t as I will explain.

But what about excess hype and bubble valautions? Internet companies have always traded at a premium valuation. While the mean PE (price to earnings ratio) of companies on the S&P 500 is around 17, internet companies have an average PE of around 30-50 because those comanies are growing at a more rapid rate than offline comanies and thus usually trade at a premium. While this may increase the risk, it also substantially increases the potential upside for investors who are less risk averse.

For example, in 2005 bidu.com, a chinese internet portal, went public at $27 a share but closed the day at a whopping $120 a share with a PE ratio of around 1,500. By any metric this stock was greatly overvalued. So there should have been a huge collapse if history is any indicator because this company was so overvalued. While bidu.com did selloff  in the following months, by late 2006 it began to rebound as investors gave bidu.com a second look, as it’s revenue and growth was staggering. By mid 2007 the stock traded above $200 and now trades above $310 with a PE ratio of just over 150. While the stocked nearly trippled from its IPO closing price its PE ratio fell by 90%. In the span of nearly three years bidu.com earnings increased by a mind blowing 2,500 percent or 26 fold. There was NO bubble, no huge selloff, no implosion. Why? because bidu’s business is rock solid unlike many of the companies in the 2000 dot com bubble. Thisis also why a facebook IPO would be a goldmine for investors.

If facebook, twitter, digg.com or any other successful web 2.0 company went public it could reap the same windfall as bidu.com.  Had bidu decided not to go public due to ‘bubble’ fears it wouldn’t be valued at $10 billion dollars as it is today. Had google not gone public the company woudn’t be worth $270 billion dollars, nor would google have had the resouces as it has now by raising capital by selling selling shares. By going public companies can ’sell’ shares to public to finance acquisitions and reseach.

Instead of succumbing to irrational post dot com bubble fears, companies need to let the marketplace decide the value of their companies. Since we’re in a second internet boom and given the staggering growth in online advertising and internet usage there from a financial standpoint is almost no excuse not to.

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