When the wave of public investing in Internet companies developed in the 90’s, I was working in a technology job developing software for credit servicing applications. Before the Internet as we know it today was mainstream, some of the basic technologies were available in institutions such as the government, academia, and in some business including where I was working. The investing hype surrounding it didn’t impress me because I was familiar with the technologies.
At that time, I was not a good investor so I did get caught up in the investing frenzy. But in the back of my mind, I never thought all those companies that went public would be viable and profitable businesses. The real benefit of these new technologies would be in the back office of existing businesses, enhancing productivity and reducing costs.
This has pretty much turned out to be true. There are some exceptions, such as Amazon and Ebay which have become successful businesses and brands in their own right.
Where There is Demand…
Insiders and investing professionals should have known better in letting many of these companies go to the public stock markets. Private companies that move to the public stock markets should typically be mature companies with an existing track record of earnings. Many of the classic value investors rightly steered clear.
However, Wall Street wasn’t peddling anything that there wasn’t demand for. Clearly, there was demand for these IPOs by investors and it was met.
Where are the Earnings?
Many of these companies that went public has very little revenue much less earnings. When looking for companies to invest in that are on the public markets, you want to steer clear of companies that do not have a good record of earnings. How are you going to make money, if they are not making any?
The expectation by the investors for many startup technology companies is for the company to be acquired by someone else. Microsoft and Google, e.g. acquire dozens of companies each year, the vast majority are private companies. Therefore, the real earnings ability of these investments would be relevant when evaluating the balance sheet of the acquiring company.