Posted by Tom Foremski - January 7, 2011
The high valuation of Facebook on secondary share markets might be out of line with its revenues but it does show one thing: a large investor appetite for investing in leading Silicon Valley companies.
The fact that the investors are making large bets without having access to the underlying financial information is similar to the wild days of the dotcom boom, when companies were able to IPO on the basis of very little proven financial information. Investors were happy to pay high multiples for a stake in a business that might have a bright future.
The comparison between now and the dotcom boom has been noticed by others.
Stephen Grocer on the WSJ's Deal Deal Journal writes:
Suddenly it feels like 1999.
LinkedIn reportedly is planning to go public this year. It likely won't be alone among the shiny, new social media start-ups. Twitter, Groupon and Zynga could well join LinkedIn in tapping the public markets this year. That list ignores Facebook, which won't go public this year but likely will in 2012.
He notes that in the first week of this year, 110 companies filed to go public. Last year there were a total of 110 IPOs and there were 61 filings in the first week of 2010.
Facebook's ability to raise huge amounts of money on the secondary market essentially amounts to an IPO, says Bob Ackerman, a leading SIlicon Valley VC. That bodes well for other companies looking to raise capital.
What's unknown so far, is if investor appetite for other companies will carry over from the Facebook effect.
IMHO I believe that investor enthusiasm for other companies will also be high and that there will be less scrutiny of current financial performance.
While the lessons of the dotcom dotbomb were to beware the rush of investors into stocks with little real financial performance, the fact remains that investors have always looked to the future and disregarded current financial performance.
The high valuation of Facebook demonstrates that this effect is still in place and that this is what will help build the next bubble in stock markets.
And with the collapse of real estate markets there is a need for a new investment market for all the capital sloshing around.
The government is bound to regulate secondary markets and that means IPOs will become the chief vehicle to funnel all that investor enthusiasm.
Hold on for an interesting ride in IPOs and stock markets this year.