Remember when it was 1999? All that hype about Y2K and the world being taken over by machines; terminator style? Conjure up memories of those years, and you’ll recall that investors were falling head-over-heels for web darlings like Microsoft (NASDAQ:MSFT), Cisco (NASDAQ:CSCO), Intel (NASDAQ:INTC) and others. Those years saw the mania of the internet bubble reach its height as companies like these were trading at insanely high earnings multiples and growth potential seemed limitless. Eventually reality came knocking at the door and share values plummeted, but have investors continued to overlook these firms irrationally in the past decade?
According to one columnist this perspective is dead-on. With all the media attention and market craze web 2.0 startups LinkeIn (NYSE:LNKD), Yandex (NASDAQ:YNDX), RenRen (NYSE:RENN), and other looming IPOs (Facebook) have attracted in recent weeks, should investors be setting their sights on past dalliances in the hopes of reaping steady profit from tech businesses? Consider these numbers: Last week LinkedIn made its IPO, and is now trading at 17x projected yearly revenue. Facebook, expected to IPO soon, was recently pegged at a value of $100 billion, 50x its last reported earnings of $2 billion. RenRen, which also just issued its first shares of stock to public markets, is currently trading at 52x revenues. (See “LinkedIn Stock: Which Shareholders are the Idiots?“)
With these inflated numbers, and many analysts warning of a burgeoning web 2.0 investment bubble, the smart more for the intelligent investor may be to harken back towards 80s and 90s web boomers such as IBM (NYSE:IBM) and HP (NYSE:HPQ), which are currently trading at much more reasonable earnings multiples and are also projecting growth of over 10% per year until 2014. How about Microsoft (NASDAQ:MSFT), currently trading at 1/2 its stock price of 1998, which continues to expand into new markets (such as video games, entertainment, and communication, with the purchase of Skype), and is projecting growth of 15% this year. Microsoft also generates $2 billion in cash flow per month, raised its last divided by 23%, and has reduced outstanding shares on the market by two billion over the past five years.
One has to wonder why companies such as these continue to go overlooked, and the obvious reason is that… oh wait, I need to update my Facebook status before I post this article. Humor aside, the exuberance behind the social media craze may not be unfounded, as many skeptics are beginning to suggest. Rapid appreciation in value for tech companies usually ensues within the early stages of corporate development, shortly after hitting the public markets. Investors may be thinking more about potential future profits than current balance statements when buying into companies like LinkIn (NYSE:LNKD) and RenRen (NYSE:RENN). Not that these buys represent sound fundamental investments, but to say that these companies are all hype and entirely lacking in financial merit is overly cynical.