Last week, another landmark was achieved in venture capital history, when Apple reached a market value of $625 billion by passing Microsoft's previous record of $620 billion in 1999, hitting an all-time high value for the company. And this Monday after winning the patent case against Samsung reached another all-time high by reaching a $635 billion market cap. By comparing this value with the inflation-adjusted value of Microsoft, which is $850 billion, Apple still has a way to go to becoming the most valuable company after adjusting for inflation, but this is a promising achievement without a doubt. Today, Microsoft's market value is around $260 billion. By comparing the companies based on their price to earnings, which for Apple is around 13 P/E, which is below the fair market values of 16 and 17 P/Es for S&P companies on average, Apple has the potential to become the most valuable of all times with the iPhone and iPad Mini coming this fall.
However, there is another crazy story involving other technology companies like Facebook, Zynga and Groupon. These three companies recently completed their initial public offerings (IPO), and their late investors turned out to be the losers of the market. Take Facebook; it has already been three months after the introduction of the IPO and the stock value is half of the initial IPO price of $38. Half of the value of the company has been slashed, which was initially set at around $100 billion.
This tells us that the future of the company and the business model is more important than the number of users and subscribers. Eventually, companies have to make money for their owners. Early entrepreneurs, of course, made handsome profits from these tech and IT startups, but this may not necessarily be the same story for the latecomers. In the near term, Facebook has to find a way to earn money from mobile users. For investors this is the critical question. How are you going to make money? The potential is out there. There is no question about that. Nobody would have thought that people would be able to find every item they need via Google ads; other search engines would have said “not possible” to this. But Google did it successfully and dominated the market.
Same for Apple; the Mac was not enough to make it the most valuable company on earth. Once they start introducing revolutionary gadgets like the iPod, and then the iPhone and the iPad, they reclaimed their initial value. But show me an Apple user today who could have guessed the value of Apple back in 2005. Venture capitalism is a way of taking risk for big profits. That's exactly what many early investors do.
Groupon, a leading deals website, offers you big discounts from your local retailers and restaurants. In 2010, in the second year of operation, Groupon made $313 million in revenue, 22 times more than the first year, and the growth prospect was enormous at that time. Then the IPO came in November 2011 with a stock value of $20 per share, or a $12 billion market value. But 10 months after the IPO, the stock value is around $4.50, or a $3 billion market share. Zynga is no different than these two companies. Successful, profitable companies with a perfectly good business model are not enough to ensure a good IPO; rather, the potential for future growth is a necessary component.
Recent rumors are equating the lack of success of the technology 2.0 IPOs in recent months to the days of the tech bubble. Another blow to tech companies and Silicon Valley would not be helpful to American consumers and the economy in general. Also, the greed to make the most profit from these companies has made IPO buyers unhappy, with the loss of large amounts of money, which in turn has made investors shy away from the tech market. These are not happy developments for the smart kids of the tech 2.0 boom.
