Wall Street Beat: Yelp IPO another sign of hot tech market

Nasdaq gets back to 2000 levels as Apple continues to soar

Earnings season has essentially ended, but Yelp's initial public offering Friday, Apple's record high share price and a strong market for IT stocks are giving tech investors plenty to get excited about.

Yelp shares jumped 60 percent in its first hour of trading Friday, after pricing at US$15 on Thursday night, showing strong demand from investors. Yelp, founded in 2004 to offer a focal point on the Web for local businesses and customer reviews, is the latest tech company in a wave of IPOs that is rising on increasing confidence in the stock market and the economy.

Worries about slow U.S. economic growth and sovereign debt in countries including Greece and Italy, which raised concerns about the possible breakup of the eurozone and chaos in financial markets, depressed stocks and caused turbulence in the markets last year. In that climate pricing IPOs was difficult.

Growing confidence in the economy, however, has boosted markets as well as the number of companies in the IPO pipeline. In the last 12 months, 173 companies launched IPOs in the U.S., but there are currently 228 companies that have priced IPOs and are set to go public.

The tech sector has been leading the pack.

"Tech is king," said John Fitzgibbon, who runs IPO Scoop.com. "There's an old saying, 'The tape tells the story;' just look at the returns and the traffic," Fitzgibbon said.

In terms of traffic, or number of IPOs, tech was by far the IPO leader in the last 12 months, representing 37 initial offerings. In comparison, the second-ranking sector, consumer services, accounted for 26 IPOs. In the IPO pipeline right now, there are 38 tech companies set to go public, including social networking superstar Facebook.

And, although Yelp has never turned a profit, investor excitement over the company Friday is most likely due in part to the success tech companies have had on the stock market. Tech has had the best return record of any sector in the IPO market this past year.

In terms of returns over opening share price, tech companies, for example, accounted for five of the top 10 IPOs in the last 12 months. They included motion processing company InvenSense, with a 107 percent return; data security vendor Imperva (105 percent); social networking and collaboration software vendor Jive Software (105 percent); social networking vendor LinkedIn (93 percent); and telecom expense management company Tangoe (86 percent).

An underlying reason for the surge in IPOs is confidence investors are displaying on the stock market. "The IPO market is a follower, not a leader -- it needs wind to set sail," Fitzgibbon said.

The markets have done well so far this year, responding to economic data. Year-end data released by the government shows that the U.S. economy picked up in the fourth quarter of 2011. The Commerce Department said Wednesday that gross domestic product rose at a 3 percent annual rate in the fourth quarter, the fastest pace since the second quarter of 2010.

Though the Dow Jones Industrial Average and the S&P 500 got off to a shaky start Friday, unless markets close down significantly for the day, they are set to finish nine straight weeks of gains. On Tuesday, the Dow closed at 13,000 for the first time since 2008, before the implosion of Wall Street in the autumn of that year. The S&P has also hit its pre-recession level. The tech-heavy Nasdaq has been grazing 3,000, a level it has not registered since 2000.

The Nasdaq computer index is up 17.63 percent for the year, better than any other sector in the U.S. markets.

Apple, which hit a record high share price of $500 this week and was trading at $544 Friday morning, has become the lodestar for tech. It has surpassed $500 billion in market capitalization (share price multiplied by number of outstanding shares), making it the most valued company on the planet.

Though Steve Wozniak, Apple's co-founder, concedes he is not a stock market expert, he told CNBC in an interview on Thursday that the company's share price could reach $1,000. It has great growth potential, due essentially to a pipeline of products that will continue to offer the sort of integration of services that the company has been noted for, he said.

"You know, people talk about a $1,000 stock price," Wozniak said in the interview. "At first you want to doubt it but I actually believe that."

As high as Apple's share price is, it does not seem overvalued relative to other companies. For example, while Apple trades at 15 times its earnings for the last year, Google trades at 21 times earnings. The average S&P company trades at 14 times earnings. Meanwhile Apple continues to astound market watchers with growth that is rarely, if ever, seen for a company of its size. In its last quarterly report, Apple said net income increased 118 percent from a year earlier, to $13.06 billion.

Signs are that Apple can continue to grow. After conquering the consumer tech market, the company is now doing well in the corporate market. For example, Apple is selling more Macs to businesses, according to Charlie Wolf of Needham & Company. Wolf reported recently that the business market accounted for 20.5 percent of Mac sales in the fourth quarter of 2011, which equates to growth of 50.9 percent in that market.

Meanwhile iPhone and iPad sales remain strong. "Our monthly channel checks indicated very strong sales trends for the iPhone 4S at all three U.S. carriers and overall strong iPhone sales in international markets. We are increasing our March quarter iPhone estimates from 30.1 million to 32.6 million units," said Canaccord Genuity technology analyst Michael Walkley in a recent research note.

The Apple phenomenon may help explain why tech is so alluring for investors, notes Fitzgibbon.

"Tech is the breeding ground of the future," Fitzgibbon said.

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Marc Ferranti

IDG News Service
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