For a bubble-wary Internet observer, some of the indicators may seem ominously similar to the dotcom boom. But 2010 is no 1999
These are tough times for the US equity market. The fear of a double dip recession looms large. Investors are wary and quick to punish stocks for the slightest hint of shrinking margins or slowing growth rate. Nothing surprising; investors are still licking the wounds caused by the recent crisis.
But then how do you explain Makemytrip.com? On August 12, the online travel agency got listed in Nasdaq and raised $70 million from an initial offering of five million shares at $14 each. On the first day of trading, the share price rose 89 percent. In the days that followed, its market cap crossed a billion dollars. Investment Web sites called it the hottest IPO since 2007. Now, here’s the interesting part: The company has not made a single penny in annual profits so far. It lost $6.2 million in 2010, $7.3 million in 2009 and $18 million a year before, on revenues of $32 million, $19 million and $14 million, respectively. Makemytrip.com may be among the most talked about companies in the Internet space in recent times, but it is not the only one.
The valuation of Internet companies from emerging markets has gone up significantly in the last one year. While the Nasdaq composite index grew by about 12 percent in the last one year, in many cases share prices of these companies more than doubled. For example, share prices of eLong and ctrip — both online travel agencies — grew by about 131 percent and 69 percent respectively in the last one year. The market cap of Chinese search engine Baidu went up by over 154 percent in Nasdaq. Shares of 51job.com, a recruitment company, grew by 125 percent.
Their PE ratios — or the price per share over the net profits per share, an indicator of investor expectations — also suggest optimism. Nasdaq’s PE ratio is about 21. HiSoft, a Chinese technology company which recently listed in Nasdaq, has a PE of 933. eLong’s is 129, Ctrip’s 52, Baidu.com’s 88. (Google’s by way of comparison is 20.)
K. Vaitheeswaran, who left his job at Wipro during the dotcom boom days and has been running Indiaplaza, an online shopping Web site, for the last many years, says that things have changed. The Internet was a new medium in the late 1990s. Now, people know its power and at least 50 million have access to the Net. But Vaitheeswaran knows that he is stepping on slippery ground when he says that. “When we were 3 million, we thought 20 million would be an inflexion point. But that was not to be. But still there is room for optimism because it took a long time to reach 50 million from 3 million. It will not take so long to go from 50 million to 100 million.” 3. The missing business plan: But that still doesn’t solve the problem with business plans. During the last boom, one of the biggest drivers of the bubble was the examples of companies that did not earn revenues but were everybody’s darling. Entrepreneurs quoted them to ask for more funds and investors looked at them to justify their own actions. The argument goes: Google did not have a business model for a long time. Twitter came up with a revenue model only recently with its sponsored tweets. Things haven’t changed much today, partly because technology is still evolving. Rohit Regonayak, co-founder and CTO, Trellisys.net, a software services firm that focuses on technology start-ups says, “The need to be profitable from the start is overtaken with the hope of being one of the torchbearers in the next evolution of the Internet.”
(This story appears in the 24 September, 2010 issue of Forbes India. To visit our Archives, click here.)