IPO activity on Wall Street is heating back up.
This week saw King — the maker of the addictive game Candy Crush — go public, only to see its stock tank three straight days in a row. Also this week we got the S-1 filing from Box, which makes a cloud-based file system, and though the company is a phenomenon, it’s bleeding an unholy amount of cash. Still! The IPO window is open.
So is the bubble back? Is it 1999 all over again?
The answer is no. And if anyone says that this is 1999 all over again, it’s because they don’t remember 1999.
To wit, let’s take a look at the IPO of a company called Sycamore Networks, a maker of networking gear.
It went public in October 1999.
Here’s how CNET described the offering:
At the opening, shares peaked at 270.88, then traded between 200 and 250 before closing at 184.75, giving the company a market capitalisation of $US14.4 billion. Trading volume was heavy at 9.9 million shares.
Sycamore closed with the biggest market value ever achieved by an Internet-related company in its first day of trading, according to CommScan. It is also achieved the fourth-largest gain–386 per cent–for a U.S. stock on its first day of trading.
So the company had a market cap of $US14.4 billion. How did the financials look?
Sycamore generated $US11.3 million in revenue and posted a loss of $US19.5 million for the year ended July 31, compared with no revenue and a loss of $US693,000 the previous year. All of the company’s revenue so far has come as a result of a contract with telecommunications carrier Williams Communications, according to the company’s Securities and Exchange Commission filing.
So this company had ONE customer worth $US11.3 million. That means the company was debuting with a price-to-sales ratio of 1274.
King, by contrast, has a market cap of $US5.7 billion against trailing revenue, according to Yahoo Finance, of $US1.8 billion. So that’s a price-to-sales ratio of just over 3. King is also wildly profitable.
So, to back up.
The Sycamore IPO came public with a price-to-sales ratio of over 1,000. With King it was just over 3. And while the former wasn’t profitable, King is extremely so.
Also, it should be noted that Sycamore went on to surge for the next several months.
That being said, Sycamore’s stock is very sad these days.
After peaking at a reverse-split adjusted price of over $US1,600 per share, the stock is now trading on the pink sheets at about 50 cents per share, a decline of well over 99%.
The amazing thing is that Sycamore wasn’t an isolated story. It’s a story that was repeated over and over again.
In December, the maker of Linux servers ,VA Linux went public with a $US10 billion market cap on revenue of just $US15 million.
It’s fine to look for signs of froth in the current market (and when you look at the action in the biotechs and the fuel-cell companies, it’s easy to get nervous). But please don’t embarrass yourself by talking about “99.”