13 February 2014

Boom without the Bubble? 2014 vs. 2000 IPO Activity

Initial Public Offerings (IPOs) are on track for their best year since 2000, the end of the dot-com boom. It's only February and already 31 companies have gone public, a 72% increase over last year. And they've raised $6.5 billion, which is up 22% from last year. And 39 companies have filed IPO intentions, up from 21 for the first two months of last year.

This bodes well for business expansion. IPOs are the simplest indication that new businesses are succeeding, and expanding businesses more jobs, more wealth, and more interesting new products and services.

Of course given the stock market has been steadily trending upwards for years now, it's easy to find as much warning as promise in a year that promises to be "as good" as 2000, the last year of the dot-com boom before it become a dot-com bust.

Which brings us to P/E for the S&P 500 - the simplest measure of how much people are paying for profits. (To be clear, this is the ratio of today's price to earnings for the last 12 months; when a business is growing, it makes perfect sense to pay a high P/E ratio given that you expect future profits or earnings to be considerably more.)

As of January 2014, P/E for the S&P 500 was about 19. By contrast, in January of 1999 and 2000, the P/E ratio was 33 and 29. In 2000, the P/E ratio was 1.5X as high as it is now. It was 19 in January of 1997, when the S&P 500 was at 757 - a low it has not dipped to since, even at the depth of the crash in 2008. By January 2000, it had nearly doubled to 1498.

So it seems to me that this IPO Boom is more solid than what we had at the tail end of the dot-com bubble. IPO activity could be as high but it isn't driven by over-priced P/E ratios that reflect irrational exuberance. Instead, these IPOs are coming into a market that is fairly reasonably price. This might be a boom rather than bubble. And if it is, these next few years could make everyone revise their forecasts upwards.

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