After a long slump, Internet and technology stocks are hot again but can they survive their own hype?
The strength of new initial public offerings from Google Inc. to Los Angeles-based Jamdat Mobile Inc. and Shopping.com Ltd. helped spark a broad-based stock market rally that began in the third quarter and has lifted many beat-up tech issues.
Post-election momentum helped pushed the Nasdaq up 6.5 percent and the Dow Jones Industrial Average up 5.4 percent since the beginning of November. The Standard & Poor’s 500 Index last week reached new highs not seen since 2001.
Signs of a technology rebound are popping up everywhere.
Online advertising jumped 35 percent in the third quarter to a record $2.43 billion, according to the Interactive Advertising Bureau, an industry trade group. Pent-up demand helped the IPO market notch its best year for new stock issues since 2000. Several local stocks, including Internet telephony provider Tekelec of Calabasas, and semiconductor maker Diodes Inc. of Westlake Village, have recently hit 52-week highs.
“The real driver here is online advertising and the success of a business model like Google,” said Jonathan Funk, managing director at Santa Monica-based Allegis Capital, which directs start-up investments in semiconductor, network software and Internet companies.
Google, which hit $200 a share just 60 days after going public at $85 (but has since pulled back), has proven to investors that advertising-supported search engines are a growth area.
But analysts caution that the rally among Internet IPOs could be short-lived. Plenty of hot issues have already gone down in flames.
When Salesforce.com, an online management software company, went public in June, its shares closed at $17.20 a share, 56 percent above its offering price. But the stock seesawed down to $11 a share after a disappointing earnings announcement and then staged a comeback.
Wireless game company Jamdat had a run-up to $32.50 a share, just weeks after a $16 IPO. But a dismal third quarter conference call and disappointing guidance yanked the stock back to earth; it was trading at around $24.50 last week.
“There’s no doubt that tech is coming back and, more importantly, the IPO market is coming back because there’s a substantial amount of money that has been sitting on the sidelines,” said Tom Taulli, an analyst following public offerings and a co-founder of Web site CurrentOfferings.com.
He believes a new bull market began in the last week of October.
Nevertheless, he said, “Investors are still skeptical because they got so burned in 2000 and I think they’ll stay skeptical for some time.”
There are few comparisons between the current rally, which remains confined to a handful of sectors, and the dot-com boom and bust years of 1999 and 2000.
Internet-related IPOs have performed well over the last few months, ranging from giant search engines such as Yahoo Inc. to smaller businesses such as Tekelec, which provide products or services for shifting telephone traffic over to the Internet. By contrast, semiconductor companies and makers of computer peripherals have not caught on.
This time around, many companies have actual revenues and earnings that can be measured. Competition has weaned out many weak competitors. And because technology stocks have underperformed the broader market over the past three years, many investors are chasing specific subsectors they believe remain undervalued.
“We’re certainly seeing signs of the economy heating up and there is a bull case to be made for semiconductors, which have been the worst-performing group in the technology sector year-to-date,” said Gary Mobley, an analyst at B. Riley & Co. in Los Angeles. Mobley recently downgraded Diodes to “neutral” because he thinks the maker of semiconductors for cell phones, MP3 players and laptop computers is overvalued at $27 a share.
Market watchers are divided in their outlook for 2005, when the technology sector will need a boost of capital spending from large corporations to avoid losing steam.
For now, there are no signs of a rebound in capital spending, which bodes ill for stocks in semiconductor, computer and software sectors.
Financiers at work
Still, the strengthening IPO market has given new impetus to venture capitalists, angel investors, and investment bankers working on mergers and acquisitions. With technology companies seeing their stock prices increase, there’s an expectation that companies will tap into their rising stock prices to make more acquisitions.
Nick DeSai, vice president at KPMG in Los Angeles, is seeing a big resurgence in private M & A; activity, particularly for Internet advertisers.
“What’s happened is the big companies like Google have figured out the advertising model and now big advertisers are spending more money on the Internet,” DeSai said. “When the Procter & Gambles of the world start putting more money into Internet advertising spending, then companies in that space are going to do very well.”
Merger and acquisition activity rebounded in the third quarter with a 67 percent jump in announced U.S. deal volume totaling $561 billion, up from $336.7 billion in the third quarter of 2003, according to Thomson Financial.
John Morris, managing director of GKM Ventures and president of Tech Coast Angels, said more venture capital firms are seeing a resurgence of activity simply because of the rebounding stock values.
“There clearly is a tech rally with billions that corporate America is keeping on the sidelines,” he said. “The question remains whether they’re going to put that money into technology software and hardware in the next year.”