Investors, investment bankers and Internet entrepreneurs are hungrily watching the market's reaction to Google Inc.'s proposed $2.7-billion (U.S.) stock offering announced yesterday, hoping the IPO of the stunningly successful search company will kick off another boom in Internet stocks.
But while there is clearly some frothing over the most anticipated stock deal in years, analysts don't expect Google's IPO to signal a return to the irrational exuberance that inflated the 1990s bubble.
On the contrary. Analysts say the Google IPO represents the maturation -- in a business sense -- of the Internet. The frenzy involved in pitching the possibilities of a new medium has given way to the sober calculation involved in how to make it pay. And the best that investors can hope for -- once an initial stampede has ended -- is some rational exuberance.
The big difference between now and then: Google is a real company with 2003 revenue of close to $1-billion and a profit of about $105-million.
It ultimately will be measured against firms such as Yahoo Inc., eBay Inc. and Amazon.com Inc.
So many of the dot-com chimeras of the 1990s were born of a bright, young engineer's imagination, a venture capitalist's enthusiasm and speculators' greed. They generated IPOs with stratospheric valuations but had no revenues to back them up. Many -- like eToys and on-line grocery deliverer Webvan -- did not survive.
Privately owned Google, of Mountain View, Calif., had until midnight last night to submit a filing with the U.S. Securities and Exchange Commission laying out key information that until now has been a closely guarded secret.
Given that it must now report as a public company, Google took the opportunity to detail its plan for a $2.7-billion public stock offering -- the most significant IPO from a tech company since the bursting of the Internet bubble in 2000.
The Google offering is clearly a landmark event. Rarely does a startup come to market as such a household name. The company, which was founded in 1998 by two Stanford University graduate students, now has the world's leading search engine.
So pervasive is its reach that its company name has morphed into a verb: to google is to search the Internet for a name or phrase. (The name derives from googol, the word for 1 with a hundred zeros behind it.) While investors are expected to eagerly snap up shares, analysts are warning against inflated expectations.
Mark Stahlman of Caris Co. said the economy has moved into the third phase of a long-term technological revolution, meaning the approach to valuing tech stocks will be fundamentally different than it was during the dot-com boom.
The 1990s bubble represented the "frenzy phase," in which the possibilities of a world-altering technological innovation had yet to be delimited. "Basically, in the 1990s, you had people throwing something against the wall to see if it would stick. And a lot of it didn't," Mr. Stahlman said yesterday.
Google, founded by Stanford University computer science students Sergey Brin and Larry Page, had its gestation in that heady period and received millions of dollars in financing from venture capitalists, who were financing just about anybody with a Stanford degree and a good idea.
But Mr. Brin and Mr. Page were in no hurry to rush their brainchild into public hands, and then lost the opportunity when the bubble burst and the frenzy ended in 2000.
Now, Google's offering comes at the front end of the maturation phase of the IT revolution, when investment dollars flow to the companies that have a profitable business plan for deploying technology.
Google has been profitable since 2001, and has seen its revenue jump to $961.9-million last year up from $347.8-million in 2002, and only $86.4-million in 2001.
Mr. Stahlman said there is considerable irony around the hoopla over Google, since Internet stocks will likely fare no better than a whole host of technology companies, including semiconductor makers, switch makers and software companies, all of which are riding a wave of renewed corporate investment in technology.
"Google should be taken as a signpost pointing to the return of technology as a growth industry," he said. In fact, Google faces some significant challenges in meeting expectations that it will continue the exponential growth that it has seen in recent years.
And industry insiders worry that a pratfall could once again sour the IPO market for startups.
That market has been steadily recovering from the dismal years of 2001 and 2002.
Thirteen companies with venture capital backing went to market in the first quarter of this year and raised a total of $2.72-billion, the best performance since the third quarter of 2000, according to a survey by Thomson Venture Economics and the National Association of Venture Capitalists.
And there are 50 more technology startups -- from biotech firms to Internet dot-coms -- in the pipeline that have IPO registrations filed with the SEC.
Mark Heesen, president of the National Association of Venture Capitalists, said the Google IPO will likely not spark a rush to the market, even though many investors are holding stakes in startup companies that they have been unable to unload since the bubble burst.
"People are taking a more conservative approach -- they are only putting out companies that the venture capitalists deem worthy to be put out -- meaning they have to have some revenues and even profits," Mr. Heesen said.
He added, however, that it is important that Google is priced right so that it does not sink beneath the offering price once it hits the market. A flop by Google could once again erode confidence in Internet stocks.
Analysts Scott Kessler, an equity analyst for Standard & Poor's, said he expects Google to do well if it is valued in line with existing Internet stocks such as eBay and Yahoo.
E-Bay was trading yesterday at roughly 18 times expected revenue per share for 2004, while Yahoo was trading at 13 times revenue. A similar valuation for Google would yield a market capitalization of about $12-billion to $14-billion -- comparable with the two more established companies.
Mr. Kessler said Google has done an excellent job generating profit from its Internet search business, but faces a "daunting challenge" ahead. It faces tough competitors from companies such as Yahoo and Microsoft, which have signalled they want a greater slice of the search engine business. At the same time, Google is looking to expand into other business lines, but has had mixed results so far.