Internet IPOs Find Saturation Point

We’ll find out Tuesday if the Federal Reserve will raise interest rates
to slow down the white-hot U.S. economy. But here’s one thing we already do know: The fear and uncertainty about
a rate hike has helped chill the Internet IPO market to the point where
the monthly total of Internet IPOs will go down in August for the first
time this year.

Counting four Friday – from MyPoints.com, LookSmart, LionBridge
Technologies and Agile Software – there will have been 23 ‘Net public
offerings this month to date. That leaves August a dozen IPOs short of
July’s record of 35, with seven trading days left. I suppose it could
happen, but it’s a mighty long shot.

With some notable exceptions such as Red Hat, Quest Software, Internet
Capital Group and SilverStream Software, ‘Net IPOs in August have failed
to gain much altitude. (Agile is aspiring to make that short list of
rocket launches. The stock opened Friday at $43.50, more than twice the
$21 offer price.)

Even discounting the dampening effect of interest rate fears, it may be
that the saturation point for Internet IPOs is about 30 or so per month.
After that, competition for investor dollars exacts an exceedingly high
cost in terms of opening-day performance. Just ask HeadHunter.NET or
Mortgage.com.

Still, an average of seven or more Internet IPOs per week seems to be
more than adequate for any investor looking for a new game on The
Street, especially considering that there were five Internet IPOs in all
of August 1998 (followed by one in September and none in October).

I’ve heard from some readers who argue that there’s an overemphasis on
ticker debuts in the Internet space. After all, any stock lives to trade
another day after its IPO, and long-term growth and profitability should
be the ultimate goal for the company and its investors. Those are
entirely valid points.

The problem is that it may take a long time for any company’s stock to
recover from a stumbling start. The spotlight shines elsewhere,
attracting investors and draining volume (i.e. demand). Further, a
depressed market capitalization can affect a company’s strategy,
especially if part of that strategy is pursuing acquisitions or rolling
out a high-profile, expensive marketing campaign. It can even render a
company vulnerable to takeover.

Another problem is that many investors have no intention of being
long-term. It’s that initial trading frenzy, when shares are flipped,
that sends so many Internet IPOs soaring. Without it, there would be no
moonshots. And that, no matter what you hear about long-term growth, is what every Internet company wants.


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