It’s happening again. Market caps on newly minted public companies are running wild.
Here’s the current checklist:
LinkedIn (LNKD): $8.9 billion
Pandora (P): $3 billion
Homeaway (AWAY): $3.1 billion
RenRen Inc. (RENN): $3.7 billion
Just around the corner are IPOs for Facebook, Groupon, Zynga and Square (maybe) all at multi-billion dollar cap levels. You can find great analysis on the revenue potential of each stock individually at Seeking Alpha, but a justification for actually investing relies on large assumptions. Whether it to be the number of subscribers (LinkedIn), the ability to fend off competition (Pandora) or even growing ad revenue in a slow economy (Facebook), the case for each stock relies on projections – and not fundamental analysis – to get to earnings multiples that appear sane. But what each company really needs to justify its currently sky-high market cap is an industry-destroying model. Consider these success stories:
– Google (GOOG) killed off newspapers
– Netflix (NFLX) destroyed Blockbuster
– Amazon (AMZN) obliterated brick-and-mortar bookstore
Which of the companies above will not only grow customers, market share and revenues at an impressive pace, but will change the face of its industry? If you know the answer, then that’s the company whose market cap might be in line with reality.
Clark Schultz Blog 