by David Moon
Following the Snapchat initial public offering (IPO) on March 2nd, the market now values the secret messaging app at $34 billion, or more than Hasbro, Mattel, Staples, Bed Bath and Beyond and Kohl’s—combined.
In an IPO, the owners of a private company sell shares of their business to outside investors, creating shares that are traded in a public market, like those of Apple or IBM.
I don’t feel like an old timer, but I suppose I am. I remember when that little tic-tac-toe looking thing was called a “pound sign,” not a “hashtag.” I’ve never SnapFaced anyone, or whatever it’s called.
However, being an old timer, I know that new technologies often become long-term, substantial real businesses. Many people thought television was a passing fad. I also know that for every Facebook, there are thousands of unknown failures and a couple hundred short-term wonders, like CompuServe, Netscape, Myspace and AOL. In just the web search engine business, I’ve seen plenty of businesses that promised to become Google, long before Google did. Rest in peace visions of grandeur for Open Text, Magellan, InfoSeek, Snap, Direct Hit and Web Crawler.
Picking the next Google is akin to picking the right color on a roulette wheel that has a couple of hundred colors, not just black and red.
There is a risk to use the euphoric IPO of a technology company at 73 times revenues (not earnings) as a sign that we might have returned to the irrationally exuberant market conditions that lead to the bursting of the Internet bubble in 2000. On the surface, that’s a silly notion. In 2000, the S&P 500 sold at 40 times earnings, compared to today’s PE of 23. A PE ratio measures the price investors are willing to pay for one dollar of a company’s earnings and is an indicator of investor expectations. Higher PE ratios generally indicate higher investor confidence.
MarketWatch editor Shawn Langlois, however, makes a compelling case that the underlying economic fundamentals were much healthier in 2000, justifying higher investor confidence.
In the five years prior to the 2000 market peak, GDP grew 4.1 percent annually, compared to only 1.9 percent in the most recent five years. The Federal debt, now 101 percent of GDP, was only 60 percent in 1999. Personal and corporate debt has more than tripled in 17 years. S&P 500 earnings growth in the three, five and ten years prior to 2000 all exceeded 7.50 percent annually. In the most recent periods, annual S&P 500 earnings growth was -3.9 percent, 0.50 percent and a whopping 0.89 percent.
I am not predicting a 2000-like market decline. But stock prices, as measured by indices, are not inexpensive and could be more overpriced that is superficially apparent.
David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN)