Tuesday, July 12, 2011

Are New Tech IPO's Overvalued?

I went to a roadshow for the Zillow IPO yesterday.

Started in 2006, Zillow is a company that has developed and maintains a very extensive database of residential real estate information that is freely available on the net. Zillow can be accessed via http://www.zillow.com/.

I won't go through all of the features of the site, but if you are thinking of buying or selling a home it is truly useful.

Or, if you just want to be a voyeur, you can check to see the asking price for other houses in your neighborhood, or the prices of recent real estate transactions.

Zillow is easily accessed by the free app that you can download on your iPhone, iPad or Android phone. According to the company founders, the Zillow app is the #1 downloaded financial app on smart phones.

The founders of the company also started Expedia, the on-line travel website that is now widely used by thousands of travelers. The idea behind Zillow, management said yesterday, is the same as Expedia: give the consumer the ability to use an extensive database to make informed purchasing decisions without using an intermediary such as a real estate broker.

The Zillow website is cool, and the idea is truly exciting. But when it comes to valuing the company, well, that's a different story.

Zillow has not made any money in its short history. In 2010 it had total revenues of approximately $30 million, and lost about $7 million. Still, traffic at the Zillow site has been soaring, and there is significant revenue potential through both on-line advertising as well as partnering with affiliates such as mortgage companies.

The IPO is offering roughly 10% of the company for $45 million, with the founders and initial investors holding the rest of the shares. Put another way, the company is being valued at around $450 million, or 15x sales, which puts it at a valuation that I will have to take a pass.

That said, I bet the IPO does well - the lunch meeting was packed, and the hotel had to set up tables in the hallway to accommodate all of the attendees. Zillow is apparently one of this summer's "must have" stocks, like LinkedIn or Pandora Media.

I could be missing something.

Sunday's New York Times had an interview with Marc Andreessen, one of the most prominent venture capitalists in Silicon Valley and the founder of Netscape, which was the first web browser.

Mr. Andreessen thinks that old style investors like me are totally out to lunch:

Contrary to all the recent hype about a bubble, you’ve said that tech companies are actually undervalued. So in true 1999 fashion, should I take my life savings out of mutual funds and toss it into tech stocks?

I’m certainly not an investment adviser, but on a 30-year basis, these things are cheap. If you compare how big industrial companies like G.E. are valued compared with big tech companies like Microsoft, Cisco, Google and Apple, tech stocks have never been valued more poorly in comparison. So not only is there no bubble — these prices are reflective of the fact that the market still hates tech. This bubble talk is about everybody being unbelievably psychologically scarred from 10 years ago.


I'm not convinced, but I am willing to concede that Mr. Andreessen might be on to something.

Take Microsoft, for example. The market cap of Mr. Softy is $225 billion, which makes it one of the largest companies in the S&P 500. Yet its core franchises - the operating system, and ubiquitous Windows software - is under fierce attack. The PC market is shrinking, as consumers move to smart phones, and Microsoft is now offering a package deal on Word, Excel and PowerPoint for $6 monthly subscription fee on iPad.

Put another way: Zillow, LinkedIn, et. al. might not be around 10 years from now - but where will Microsoft be?