We try to watch a large number of seemingly disparate things in our quest to stay abreast of the major financial and economic trends, headwinds, landmines and cliffs that face investors on any given day. This naturally results in a need to connect dots whenever possible, but also to understand that while not everything is connected, in aggregate even a picture painted by seemingly unrelated items can provide important insights.
The U.S. financial world has been all abuzz (we used to say atwitter, but that expression doesn't work anymore...) about the LinkedIn IPO and whether it signals a renewed bubble in technology stocks. Unfortunately, the angst belies the age of most market strategists these days; if anything, the LinkedIn IPO is a sign of a capital markets recovery than one of valuation excess. Granted, the stock is listed at something like seven times 2010 sales, but in stark contrast to the tail end of the technology bubble in 2000, LNKD has rapidly-growing revenues and actual, bottom-line earnings. In other words, it is a profitable, growing company whose business is entirely on the internet. Try to find one of those among the IPOs of 2000...
What we have found even more interesting recently, however, has been the technology IPO that virtually no one is talking about. Yandex, which is Russia's version of Google and which holds 65% of the search market in Russia, raised $1.3 billion this week through an IPO as well. In fact, although LinkedIn has gotten all the press, Yandex's debut is actually the largest internet listing since Google went public in 2004. Yet despite better numbers, a more comprehensive business and dominance in what is seen as the fastest-growing online advertising market in the world, its valuation at IPO was less than LinkedIn's.
The critical point is that while most of you have heard of LinkedIn, it's likely no more than a few of you had ever heard of Yandex prior to reading this update. Bubbles feed on the greater fool theory, and on the related frenzy that the prospect of unending growth engenders among investors looking for sure things. In this case, Yandex's relative obscurity prior to the largest tech IPO since Google should reassure everyone that we're most certainly not in a tech bubble.
To us, the more significant fact is that the IPO market has returned with some gusto. Remember, Wall Street's primary function is to provide capital formation services to companies, which agree to sell parts of themselves in return for capital that can be invested into growth. That's the basic calculus that has enabled Wall Street to work for over 200 years, and which underpinned every market before it. Without a ready willingness to invest in new companies or embrace new sectors, Wall Street's raison d'etre becomes strained, and it has been argued that things like subprime mortgage securitizations are the result. The technology industry is undergoing its third IPO phase in thirty years (first the PC revolution, then networking and the advent of the internet, and now social media), each of which was made possible via the IPO engine of Wall Street. Strategists such as ourselves are heartened by the return of IPO activity, not scared by it. We're undoubtedly nearer the start of a new IPO cycle, not the end of one, and while there are legitimate concerns about valuations, this is also nothing new - your editor remembers very clearly a research report on Microsoft in the early 1990s that argued the stock was massively overvalued at $19. Our point is that demand for a stock is what drives valuation, not the other way around. LinkedIn priced at seven times sales because that was what the market was willing to pay.
The strategic implications of the IPO resurgence are threefold. First, it suggests traders are taking risks in areas away from emerging markets and commodities. This is ultimately a good thing, as it reduces volatility. Secondly, it suggests an unlocking of the financing mechanisms that have been frozen since the onset of the financial crisis in 2008 and which ultimately means easier (and thus cheaper) access to capital for all manner of companies. Finally, all the hand-wringing about valuations and an overheating IPO market, based on at best a small handful of deals, suggests anything but a bubble is forming. Considering the number of true bubbles that have appeared in the last fifteen years, we'd have expected investors would know one when they see one.
- From Leeb's Market Forecast
