What Bubble? Tech IPO Market is Sizzling!

According to financial journalists and pundits, 2011 was definitely going to be the year of the tech bubble.  It was the perfect storm.

LinkedIn ($LNKD) going public at $9B, Pandora ($P) going public without any financials, and Fusion-IO ($FIO) going IPO without any recurring customers.  This must be total insanity!  Right?

Here are just a few of the comments I heard from some well respected investors and analysts, when asked to characterize the state of the Tech IPO scene:

  • “It’s 2000 all over again!”
  • “All of these tech companies are overvalued!!!! 200 P/E?  Cmon!!!!”
  • “Tech investors still haven’t learned their lesson”
  • “This time it’s going to be 2x worse!”
  • “I should register a .com and go public for $5B!” (my personal favorite)

It just made way too much sense to pull out these one liners, right?

New tech companies are going public at a rapid rate and some of the valuations are high relative to the underlying fundamentals.  So this is one giant bubble, right?

No.  Not so much.  Just because a large, outspoken majority called it a bubble doesn’t necessarily means it’s actually a bubble.  Majority opinions are often wrong and the “2011 tech bubble” was another classic example of how the masses are usually wrong.

How could everyone be so far off on this one?  I found that most people didn’t take the time to analyze these business models, so they took an intellectual shortcut and called it all one giant bubble.

Here is one rule that I always find myself going back to when analyzing stocks :  “Analyze.  Don’t Criticize”.

When I was busy researching these Tech IPOs,  I found a lot of individuals weren’t analyzing the business models.  LinkedIn, in particular, really got taken to the woodshed both in the Financial Media and on Twitter/StockTwits.  I watched as an attractive blonde on FoxNews subtly bashed LinkedIn and said the B word, even at $45/share.  Folks on Twitter and StockTwits were even harsher – I had a discussion with a veteran trader on the eve before LinkedIn went public and they were considering shorting it, even at $45/share.

I could have swayed to the popular opinion, but instead I stuck to my guns because I knew just how much potential LinkedIn has.   I stuck to my guns, posted my bullish article on LinkedIn, traded it in the first day, and peeled off a quick profit.

So how did everyone miss the mark so much on LinkedIn?  The bears were so busy critisizing LinkedIn about their valuation that they forgot just how much value this company has underneath the surface. They broke one of the golden rules of investing…. they criticized when they should have been busy analyzing.

LinkedIn bulls like myself caught a ton of flack for being bullish on an internet stock with limited fundamentals and a sky-high P/E, but results go a long way in proving the naysayers wrong.  As of today, LinkedIn is trading at $94.54 and the stock has risen ~35% in the past 5 days.

Another recent tech IPO that has defied all expectations is the enterprise SSD supplier, Fusion-IO ($FIO).  $FIO technology allows data center customers to break through the performance barriers of traditional SSDs with a simple PCI-E SSD.  I have been hot on this company for years, so naturally I was very bullish going into the IPO.  I posted a bullish article on $FIO here at Techinsidr.com in the days leading up to the IPO.  In less than a month, $FIO is already up a whopping 38.62% and continues to look strong in a weak tech market.

It just goes to show you that fundamentals are important, but “one of a kind” technology companies like LinkedIn and Fusion-IO don’t derive their value from raw financials.  LinkedIn has built a vibrant social networking platform with over 100M white collar professionals.  Fusion-IO is a dominant player in the enterprise SSD space and their intellectual-property/patents are tremendously valuable.

It just goes to show that you cannot judge a tech IPO on a pure valuation basis or you are going to miss the important “value-add” characteristics underneath the surface.  I think a lot of investors tend to value Tech IPO’s with a broken DCF/valuation methodology when they should be thinking more big picture.   Pure financials are always important, but not for an early stage tech company is still growing and reinvesting at a fast clip.

Looking ahead, I think there are some still great opportunities out there in the Tech IPO landscape. The two best opportunities I am focused on right now are Zynga and LivingSocial.  I will be publishing my research on both of these companies in the coming weeks…

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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