Puzzling Over the Internet IPO Glut

For the moment, the carnage in the Internet and technology sector seems to have ended. Although today belonged almost entirely to real technology companies like Cisco (which I own shares of) and Intel, Net stocks didn’t really lose ground, and a few–most notably America Online–had strong upward moves. So while the days of 15- or 20-point moves up may be gone (perhaps forever), the days of forced margin calls and panic selling seem to be temporarily behind us as well.

Even as the Nasdaq and much of the rest of the market has been decimated over the past couple of weeks, I haven’t written anything about it, because I didn’t think there was anything interesting to add. When you combine rising interest rates, concerns about inflation, and a market that had priced in a lot of good news, you shouldn’t be surprised when high-priced stocks take a hit.

As for Net stocks in particular, they offer no solace to the scared investor who looks for reassurance when bad things–like last week’s eBay outage, or the rumor about Microsoft offering free Net access–happen. There are no profits (with, again, the exception of AOL) and no long track records, and in recent months there’s even been talk that Net usage is seasonal (slow in the summer). The fundamental irony about Net stocks, after all, is that investing in them is an investment in the future, and a future that’s really still years away. But most of the people investing in them appear to have time horizons that extend no further than the end of the week, if they’re lucky. That’s an incredibly unstable combination.

More substantively, the Internet sector–and arguably tech stocks in general–has been hurt by the sheer number of new companies going public. This week, 43 IPOs were supposed to be priced, which is simply a staggering number. Pick up any Monday New York Times from the past month, and check out the “equity offerings this week” column, and you’ll be astonished–at least I always am–at how many companies are trying to tap the public markets in a time of relative weakness.

A lot has been written on the effect of this IPO glut on stock prices. But the more interesting question is why a company would want to go public right now. After all, IPOs are breaking through their offering prices (that is, closing the first day of trading below where they were initially sold), and all the high-flyers of the last year–iVillage,, Marketwatch,–have been crushed in the past few months. On top of that, it’s August, traditionally the worst month to go public and a bad month to do anything in the market, since so many traders are on vacation. So why rush?