T hese 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.)
Nasdaq, the epicentre of technology stocks, is also getting busier. Forty-four companies (including 17 non-US companies) got listed in Nasdaq in 2010, compared to 27 (11 non-US) a year before, according to VCCEdge.
There is a buzz in India about public equity markets as well. Justdial.com, a local search firm, said that it’s going for an IPO early next year. According to reports, it is looking at a valuation of Rs. 2,000 crore, which is 22 times its 2009 revenue of Rs. 90 crore. There are indications of a public offering from Indiamart and Ybrant as well.
Venture capital firms are keen on this space too. “There is definitely elevated activity in terms of VC interest in Internet or e-commerce companies. The feeling seems to be that we are in the middle of something interesting from an e-commerce perspective. Whether that is the case or not, only time will tell. But I have definitely seen more interesting and serious Internet start-ups in the last three months than in the last three years that I have been in India,” says Mohanjit Jolly, MD, DFJ, which has invested in companies like Hotmail and Skype.
Satish Kataria, MD, Springboard Ventures, points to a Rs. 60 crore investment in Quick Heal Technologies by Sequoia Capital, Rs. 25 crore investment in Naaptol.com by Canaan Partners, Rs. 4.7 crore investment in Foodiebay.com by InfoEdge and $5 million funding in Vriti, a test preparation company, by Intel Capital and JAFCO Asia. Fifty-six percent of VCs surveyed by Deloitte recently said they expected increased investments in new media and social networking segments.
All these entrepreneurs and investors see Makemytrip’s successful IPO as a thumbs-up for Internet and e-commerce businesses.
Makemytrip.com founder and CEO Deep Kalra himself says he is trying not to get too carried away by the market valuation. “We priced the share at $14 and it’s trading at more than 100 percent. It’s a clear demand-supply ratio. We’ll do our bit in terms of making sure that the company delivers what it’s supposed to. After that, you can’t do much on the market. I continue to tell my team that: ‘Don’t look at the market. Focus on the work you have.’”
Bubble 2.0?
Those with a historical bent of mind will find it hard to ignore the timing of Makemytrip’s IPO. Exactly 15 years back, to the month, Netscape Communications got listed in Nasdaq. Business historians today agree that that was when the Internet bubble started. When Netscape listed, it had not made a single penny in profit either. On listing, Netscape shares boomed, making millionaires of its founders and early investors.
What followed in the next few months created new stars, throwing out the old rules on valuation. People left stable jobs to start their own ventures, with no clarity on how they could make money. Investors lost their sense of perspective. In 1998, one company, Books a Million, announced that it was going to launch an improved Web site. The result, its share prices went up 973 percent in just three days.
What is happening today carries some of the flavour of those heady days. Here are some similarities:
1. Eyeballs vs. revenues: During 1999-2000, eyeballs, or the page views a Web site attracted, became a widely tracked metric, and companies were valued based on that. Today, revenues has probably replaced eyeballs as the defining metric, says Sanjay Soni, MD of Logix Microsystems, which provides e-commerce solutions for the automotive industry and also runs Carazoo, an online car sales Web site. While it is an improvement over eyeballs, revenue by itself doesn’t say anything about the sustainability of a business. Many listed companies during the dotcom boom had revenues, but they failed because they were burning cash faster.
2. In Internet, we trust: The bubble in the late ’90s was sustained for a long time because people were essentially betting on the rapid adoption of the Internet rather than the business model of a specific company. Now, there is only a slight shift in that — now the bet seems to be on the deepening penetration of the Internet and the belief that e-commerce is closer to the inflection point (that critical point after which economics turns in their favour).
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