With the record IPO of China’s online retailer Alibaba, e-commerce shares have become the latest stock market hype. Amid two new German listings, how justified are fears of the boom turning into a new dotcom bubble?
These days, stock market investors’ appetite for e-commerce shares seems insatiable. Following the record-breaking first public listing of China’s Alibaba, the initial public offering (IPO) of German online retailer Zalando is the latest proof of that. Share orders for the Internet clothing and shoe retailer were massively oversubscribed, Zalando underwriting bank Credit Suisse said.
Many investors are also set to lose out when Zalando’s former parent, Germany-based start-up incubator Rocket Internet, begins selling shares on the Frankfurt Stock Exchange on Thursday. Rocket Internet is already billed as the biggest IPO in German stock market history, with an estimated value of about 1.6 billion euros ($2 billion).
The rush into German e-commerce shares seems somewhat strange, however, given that neither of the two companies has a record of turning a profit in recent years. In the first half of this year, Zalando carved out its first meager profit of 29 million euros – unsurprisingly well-timed for the IPO, and after years of losses.
Investors in Rocket Internet appear to be banking even more on hope, and a business model that some say is dubious. Founded by the Samwer brothers – Oliver, Marc and Alexander – the firm has won a reputation for copying start-up ideas and turning them into commercial businesses.
Emerging economies with nascent e-commerce markets like Russia, Brazil and Nigeria are their main focus, but commercial success has yet to materialize for most of their firms.
E-commerce analyst Tobias Kollmann believes, however, that a high IPO share price for Rocket Internet doesn’t necessarily mean the stock is overvalued.
“The [e-commerce] sector is still heavily dependent on outreach,” the analyst from Duisburg/Essen University told DW.
Only after an initial phase of rapid expansion would those firms be able to garner bigger revenue, he said, and added that broadening outreach can be “incredibly expensive” for online companies.
Dotcom bubble revisited
Amid the current stock market hype about Alibaba, Zalando and Rocket Internet, parallels are already being drawn to the Internet stocks boom that reached its peak at the turn of the millennium. In 1997, German stock market operator Deutsche Börse even created a special trading platform for newly-founded tech stocks called “Neuer Markt,” or New Market.
Neuer Markt share values virtually exploded amid the so-called dotcom hype, only to end up as penny stocks after the bubble had burst. In 2003, Deutsche Börse closed the Neuer Markt platform because there were only a few companies left to invest in.
Are we going to see a return of the boom-to-bust cycle? In the United States, the S&P 500 Technology Index has jumped 100 percent over the last five years, reaching levels last seen during the year 2000 boom and shortly before the 2007 financial crisis. The much-hyped IPOs of Twitter and Facebook have caused the two firms’ market valuations to multiply. The boom has been fuelled further by the listing of Alibaba on Wall Street, which has become the biggest IPO of all time, raking in a record $25 billion for the Chinese online retailer.
Cheap money boom
The rise in stock markets around the world in recent months has been primarily the result of ultra-loose monetary policies pursued by the central banks in Europe and the United States, experts agree. Stocks with a potential for growth are currently in high demand among investors, who seek meaningful returns in times of interest rates close to zero.
#According to Martin Steinbach, markets are not yet running a risk of overheating. In a recent analysis, the IPO expert with the Ernst & Young consultancy group noted that the number of new companies going public was still falling way short of those in the year 2001. Moreover, investors were much more cautious and selective about investing in risk.
Tobias Kollmann also thinks that investors have learned the lessons of the dotcom bubble. “We’ve moved on 15 years. Investors and businesses are meanwhile aware of what works in stock markets and what does not,” he said.
Klemens Skibicki from Cologne Business School shares this view. The current boom could not be compared with the hype of the late 1990s, he told DW, because investing in Internet stocks back then was a mere gamble.
“Today, the run is on [companies with] proven business models,” he said, noting that Facebook, for example, was already earning money when it began floating stock in 2012. “There is a general understanding that there is indeed a lot of money to be earned on the Internet as the medium has introduced a huge structural change.”
Skibicki admitted, however, that not all of the new public companies would survive mounting competition in the e-commerce market. But industry heavyweights like Google, Facebook and Amazon would definitely continue to shape people’s lives in future, too.
Internet search giant Google just recently celebrated its 16th anniversary. Facebook was founded 10 years ago, and for the first time in the company’s history surpassed a stock market valuation of $200 billion last week – more than half of what the biggest German companies in the blue-chip DAX Index are worth. “You could call that overvalued,” Skibicki said, “but given the huge potential in this company it is justified.”
New opportunity for IPO gamblers
Riding the current tide of rising share prices, more German companies are waiting in the wings of floating their stocks on share markets this year. According to Martin Steinbach, up to 20 firms were weighing such a move here.
Ernast and Young’s recent IPO Barometer said that the volume of newly traded shares will jump to 3 billion euros in the wake of the Zalando and Rocket Internet IPOs. By contrast, this figure reached just 2.35 billion euros for the whole of 2013, according to the report.
So, 2014 seems set to become a bumper year for investors in German stocks – in all likelihood the second best ever after a record 2007 in which 8 billion euros were spent on IPOs.