Let’s Not Build This Bubble

The hype machine may be working, as last month was the busiest August in five years for U.S. IPOs, Michael Moe, CEO of investment bank ThinkEquity Partners, told Business Week. Moreover, about 25 percent of the 30 public offerings in August had less than $200 million in revenue.

Moe explained the interest in higher-risk IPOs to Business Week this way: “Investors are starved for growth and innovation and new ideas. If you want performance, you are not going to get it out of the S&P 500.”

Nor are you going to make a quick killing with mature, slow-growth stocks. For that you need investors frenetically lining up for a moonshot. Indeed, there was a big one early last month – Baidu , the Chinese search engine, whose IPO was offered at $27 a share on Aug. 5. Trading opened that day at $66 and closed at $122.54, or 353 percent above the offer price.

On Wednesday BIDU shares plummeted 23 percent to finish at $81.32 after two underwriters of the offering gave the Chinese company an “underperform” rating, essentially saying that the stock was ridiculously overpriced. A few days before, however, in much more typical Street fashion, both J.P. Morgan and Morgan Stanley analysts offered cheery views of Chinese Internet stocks.

By definition, a stock bubble can exist only if enough investors buy into overpriced companies. Can there be another bubble so soon after the irrational exuberance of the Internet era?

Logically, you would think not. But logic isn’t necessarily part of the equation. For starters, memories fade fast, and the ‘Net bubble burst more than five years ago, a lifetime in investor years.

Secondly, small investors – the fuel and fodder of any bubble – are staring at an economy in which the middle class slowly is being squeezed out. This can generate a subconscious desperation to catch the next train to affluence before it’s too late.

There always will be forces trying to push the markets into overdrive. Certainly that was the case back in the late ’90s when investment banks, venture capitalists and large private investors played the system for their own benefit. They were helped by the advent of online trading, which small investors embraced under the delusional assumption that it somehow was leveling the field and allowing them to join in with the big boys.

Only when the Internet bubble burst in March 2000 did some realize they were still on the field well after the game had ended.

I’m not saying everyone on Wall Street is dishonest. Some will gladly offer small investors straight-up advice. I’ll even concede that much of the problem is systemic. But that’s scant solace to the investors who bought into the many profitless (and now extinct) dogs trotted out a few years ago by Wall Street investment banks.

So can a tech bubble happen again? I can answer that with another question: Do greed and gullibility still exist?

Chris Nerney is executive editor of Jupitermedia’s IT Management Channel, including Datamation, where this column and other advice-oriented columns for IT managers are published regularly.