Despite Groupon gold rush, tech is a long-term game

The current lust for technology stocks is more than just a fad, writes Ed Attwood
Despite Groupon gold rush, tech is a long-term game
Groupon
By Ed Attwood
Sun 12 Jun 2011 01:49 PM

Anyone who hasn’t heard the latest tech-related excitement blazing a path through Wall Street has clearly been staring at the underside of a stone for the past few months. The talk is all about LinkedIn, Groupon, Renren, Yandex and a whole host of other internet giants that have either already IPO’d or are planning to list this year. Analysts are split into two camps: those who think that this is the next gold rush, and those who think would-be investors in these stocks have been sniffing ‘internet inhalant’ — a term coined during the last dotcom bubble.

Our cover star this week, the straight-talking Yahoo! CEO Carol Bartz, knows more than most about the real worth of these companies. She told us that the lust for tech stocks is more than just a fad. “It might be that people are chasing a couple of shining pennies but I don’t think there’s a tech bubble. The difference is that these companies have real revenues and are making money,” Bartz said.

“Before, during the real bubble there was no revenue so there was never a way to make money. These companies have revenue and that’s the key difference. If you chose not to have a profit to grow something fast, you can, but the very fact that you have proven you can make money, revenue, is I think the key difference,” she added.

LinkedIn went public in May with shares priced at $45, before shooting up to as high as $122, making the company worth about $10bn. However, much has been made of the fact that the $10bn price tag values each of the 100 million members of the website at around $100 each, despite the fact that most of them are using it for free. But then again, the bottom line shows far more promising results, with $15.4m in profits built on the back of $243m in revenues last year.

The story gets even more confusing with Groupon, an online coupon company with 83 million members. A quick look at the firm’s IPO prospectus shows that Groupon has lost half a billion dollars since launching in 2008, and that less than a quarter of those members have ever actually bought anything. Not to mention the slew of other websites that seem to offer exactly the same service. Even if Groupon put one of its famed “two for one offers” on its own stock, you’d think most investors wouldn’t touch it with a barge pole.

But savvy investors will be looking to the past, as well as the future. One salutary lesson exists in the form of Amazon.com, which listed back in 1997. Many analysts wrote the whole concept off completely. At the time, the online bookseller was losing $6m a year — big bucks for a tech firm in those days — on sales of around $16m. While pushing for a listing that would value Amazon at $300m, the firm had a word of warning. “The rate at which such losses will be incurred will increase significantly from current levels, and its recent revenue growth rates are not sustainable and will decrease in the future,” Amazon said in its prospectus.

Not only that, but analysts also had furrowed brows over Amazon’s competition, with Barnes & Noble, Simon & Schuster and Borders — all marquee names in the world of bookselling and publishing — building up their online presence. Sounds familiar, doesn’t it?

The rest, as they say, is history. Amazon finally turned a profit in the first quarter of 2001: $5m, on revenues of $1bn. Last year, the website saw net sales increase a whopping 40 percent to $34.2bn, while profits rose 28 percent to $1.1bn.

Meanwhile, Barnes & Noble is facing an acquisition bid by Liberty Media, while Borders is teetering on the edge of bankruptcy, and has now closed almost half of its 500 bookstores.

Investors in Groupon, LinkedIn et al will all be hoping that these companies will follow the Amazon model, but this is clearly not a game for those seeking a quick return on their cash.

(Ed Attwood is the deputy editor of Arabian Business. The opinions expressed are his own.)

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