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IPO Market Spawning Far Too Many ‘Tech’ Stocks –

A successful launch doesn’t magically transform companies with banal, easily replicated business models into industry disruptors

 

What’s in a name?

How many times have we read the by-now hackneyed phrase, endlessly repeatedly by financial journalists, that investors are “hungry for tech stocks?” Do any of these purported “tech” companies manufacture new layers for graphics chips or designed a tenfold increase for the number of transistors that can be embedded on a silicon chip? Or solved the heat-dissipation issue for processors with increased clock speeds? The answer, of course, is no, no and no.

Then why are they called tech stocks?

In terms of tech stocks’ performance post-initial public offering, in the short run, how the plethora of companies in the IPO pipeline are characterized, may be immaterial and unimportant. But what about the long term, which will test how disruptive, unique or technologically ascendant these companies’ products or services truly are.

In the past, a tech company usually had something to do with…tech. Many of the recent crop of initial public offerings have been called tech stocks in the sense that they are industry or sector “disruptors.” Although most of the recent “tech stocks” that have gone public have been afforded lofty valuations, many don’t have the explosive growth potential of many tech stocks of yore, such as early-stage companies like Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) as well as semiconductor companies that all became entrenched for years and profitable within their respective markets.

Does the fact Uber (NYSE:UBER) is a replacement for the taxi cab make it a tech company, whose service is so revolutionary that it can be assured of market dominance for a long period of time? Do all of the recent so-called tech companies have the benefit of a product or service that enjoys copyright, trademark, trade secret or patent protection that can provide market dominance? The answer for many of the recent crop of companies gleefully ringing the opening bell is no.

The reason many companies looking to go public are called tech stocks is because they use or leverage existing technology, most prominently the internet, rather than create it. Judging by their eagerness to pour money into new offerings, even for those companies who have failed to turn a profit, investors may have failed to appreciate the difference in terms of the long-term growth potential for the stock.

Although the performance of some of the recent public offerings have been stellar, far exceeding expectations, other tech companies are now selling well below their new offering price as competitors eat into their profits and once predictable revenue streams.

Perhaps the most telling example that demonstrates the difference between tech stocks that introduce truly disruptive technology or business models and those whose initial novelty invites competition are the recent new stock offerings of Lyft (NASDAQ:LYFT) and Uber.

Both companies are considered industry disruptors in the sense they are looking to replace the taxi cab as a mode of transportation, but neither company has been profitable. There is not one iota of difference between the service offered by each company and, hence, neither enjoys any competitive advantage. Indeed, both companies seem to be on a path of mutually assured   Read more

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