Has anyone seen a talking dog sock puppet?
With the initial public offering market springing back to life, it's hard not to think about Pets.com, which went public in February 2000 -- just before the bursting of the late 1990s dot-com bubble. The company shut down in November 2000.
The new crop of IPOs are likely to fare better than Pets.com. But there's no denying that there is excessive enthusiasm about IPOs, particularly for any company that can claim crypto or artificial intelligence is a big part of its narrative.
Buy-now, pay later company Klarna debuted Wednesday and its stock quickly surged more than 30%. Klarna is just the latest in a long parade of hot IPOs this summer, including stablecoin leader Circle Internet Group, design software firm Figma, exchanges Bullish and Miami International and medical imaging software company Heartflow.
And there are more buzzy IPOs yet to come, with blockchain lender Figure and crypto brokerage Gemini going public later this week. StubHub is set to debut next week.
But given the large pops for several of these IPOs, followed by a gradual cooling off in the weeks after the stocks began trading, should investors be worried that history is repeating itself? Is this 2000 all over again?
There are some eerie parallels. The Nasdaq is once again at a record high. It's near 22,000 now compared with just over 5000 back at the dawn of the 21st century. And Oracle, which soared more than 35% Wednesday on the back of a strong outlook for its cloud/AI offerings, appears to be 2025's version of Cisco, the megacap that was the poster child for enthusiasm about the early stages of the internet buildout a quarter of a century ago.
But the story is different on the IPO front. That's where the comparisons to 2000 are more apt. Circle and Figma both reported net losses in their first quarter following their market debuts. StubHub, which has been around since the last tech bubble (it was founded in 2000), is a mature tech company with nearly $1.8 billion in revenue last year. But it is still losing money. Klarna and Gemini aren't profitable either. That's a potential red flag.
"Interestingly, profitability isn't a requirement. Of the upcoming IPOs none have been consistently profitable," said Phil Haslett, co-founder and chief strategy officer at Equityzen in an email to Barron's. He noted that there has been "strong investor appetite for fast growing, innovative companies after a drought of IPOs in recent years," adding that "retail demand has been a driving force."
Retail traders are clearly fueling the hype around IPOs, which often enjoy big pops due to the fact that a limited number of shares are available on their first day of trading. That's why it often makes more sense for longer-term investors considering buying shares of a newly public company to wait until insiders are allowed to sell stock. Those so-called lockup periods usually expire 180 days after the IPO.
"Look at the volatility and see how these IPOs come out. They often hit a high on the first day and then pull back. That tells me that investors still should be careful," said Reena Aggarwal, director of the Georgetown University Psaros Center for financial markets and policy.
Aggarwal told Barron's that she is worried about froth in the IPO market and added that investors need to be careful given all the hype. It pays to be patient and not try and buy on the first day.
"I like to see what happens after the earnings announcements and the lockup period expires," she said. "That gives me a better sense of what the value is."
Aggarwal added that there are other factors that limit the ability of individual investors to strike it rich on IPOs. She pointed out that supply of shares is restricted, with companies typically selling only 15% to 20% of the shares to the public. And many investors are unable to get shares at the IPO price, instead scooping them up at a much higher price once they begin trading.
"A lot of the pop happens in the premarket," Aggarwal said. "If you don't get an initial allocation and have to buy in the aftermarket, you may not do so well."
Still, experts think it may be a mistake to declare that this is 2000 all over again for the broader tech sector. For one, valuations are more rational. The Roundhill Magnificent Seven exchange-traded fund trades at about 32 times earnings estimates. That's not cheap. But it isn't bubbiliciously expensive like in early 2000 either when the Nasdaq 100 traded at 60 times forward earnings. Currently, the index is trading at 31 times forward earnings.
"We don't see valuations as particularly stretched," said Katie Klingensmith, chief investment strategist with Edelman Financial Engines in an interview with Barron's.
"We're not speculating as much about future earnings," she added. "This wave of tech change is still in its early stages but it's already producing tangible use cases. And it isn't just about AI."
So stocks like Nvidia, Broadcom, Meta, Alphabet, and Amazon are highly unlikely to suffer the same fate as Pets.com did in 2000. Or Cisco for that matter. But the jury's still out on whether the 2025 class of IPOs will still be around, let alone thriving, in 2050. Or even a few years from now.
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