March, 2017: Despite having a single product that is already being copied by many of its competitors, the stock price of Snap Inc., the parent company of Snapchat, soared 44% in its first day of trading –only to lose much of that value in the days since. Add to that the fact that it has never been clear if Snap is even profitable yet and it’s not surprising that many market observers are speculating that we may be in the middle of yet another tech bubble that could soon burst.
Meanwhile, with Cisco’s CEO estimating that the Internet of Things (IoT) will create $19 trillion worth of value over the next decade, there is rising investor interest in a wide range of companies linked to the IoT –from network IoT and security IoT security companies, to those more on the periphery of the burgeoning new industry. Given this dichotomy, the New York Hedge Fund Roundtable recently delved into the topic of investing in Internet companies.
“Investing in Publicly Traded Internet Companies: Perspectives from Veteran Fund Managers and Analysts” was the topic of the Roundtable’s March event, where Ari Shrage, founder of Aliya Capital Group, an independent research firm focused on the technology sector; Ashim Mehra, a research analyst with Baron Funds who covers Internet Software & Services, Internet Retail, Media; and Vik Mehta, who manages a growth focused team at J. Goldman & Co, where his primary areas of focus include Internet based investments, including companies in Media, Commerce, Smartphones, Payments and Software, discussed some of the similarities between the investment environment during the dot.com bubble and the current market. The panel was moderated by Jason Jones, a co-founder of the Cardinal Rose Group (which owns Lend Academy, LendIt and NSR Invest) and a member of the New York Hedge Fund Roundtable’s board of directors.
While IPOs such as Snap’s are reminiscent of the height of the dot.com bubble, there has actually been a dearth of technology IPOs over the past year. “Internet companies can be extremely volatile, and the Internet of Things has significantly expanded the universe of companies that fall within this realm,” said Adam Weinstein, president of the New York Hedge Fund Roundtable. “While it is all but impossible to ignore the similarities between the dot.com bubble and the current universe of Internet companies, one major difference is that the companies coming to market today are far more mature and they usually have a path to profitability that has already been established.”
Roundtable members believe that strong demand for Internet companies will exist throughout 2017, making the sector a profitable place to invest. 77% of respondents think that, given the absence of big name Internet stocks that have come to market over the past year, there is significant demand and companies are likely to take advantage of the uptick the equity market has experienced since the presidential election. However, 23% of respondents think that as the Internet of Things becomes more prevalent there will undoubtedly be more government regulation, spurring companies to stay on the sidelines until it is clear what any regulatory measures will look like.
New York Hedge Fund Roundtable members had the opportunity to weigh in on this topic both at the Roundtable’s March event as well as through an online electronic poll.
*Of the respondents to this survey, 29% were fund managers; 24% were allocators; 18% were risk management or trading; 25% were service providers; and 4% were other industry participants.
Following are some of the key findings:
- When asked how they expect Internet stocks to perform in 2017, 53% of respondents think the high valuation of Internet stocks that have recently come to market has more to do with an overall lack of such IPOs than actual fundamentals and that Internet stocks will ultimately underperform the broader market; 47% of respondents believe that Internet stocks will outperform the broader market in 2017.
- Since the explosion of the dot.com bubble in 2000, young technology companies have been financed primarily through venture capital and private debt, eschewing public listings until they are more mature. When asked whether this shift has made public Internet and technology companies more or less appealing, 58% of respondents said they think it is a positive change that has led to investors in the private markets getting the real value of these companies; 29% think that tech companies that go public are now more solid with greater prospects for long-term growth; and 13% think that we are likely in the midst of another tech bubble, as evidenced by the dramatic increase the stock price of Snap (the parent company of Snapchat) experienced in its first day of trading.
- Asked where the greatest value lies in regards to the Internet of Things, 52% of respondents think it is in the mobile providers that devices will rely on to interact with the Internet; 48% think that the greatest value is in Internet software and service companies.
- Asked where the biggest growth opportunity lies in publicly traded Internet stocks, 35% of respondents believe it is with companies connected to cloud-based computing; 30% think small cap Internet stocks are most appealing; 18% think that the Trump administration’s push for fewer regulations gives fintech stocks the greatest growth potential; and 17% think that major companies with recognizable names, such as Facebook, Amazon and Netflix, have the best growth prospects.
- When asked to rank the prospects Internet stocks, financial stocks, industrial stocks and healthcare stocks in 2017, 37% believe financial stocks will perform best; 27% think industrial stocks will do best; another 27% think healthcare stocks will perform best; and 9% think that Internet stocks will be the best performers. Conversely, 37% of respondents believe that healthcare stocks will be the worst performers; 27% think Internet stocks will do the worst; 18% thinks financials will fare the worst; and another 18% think industrial stocks will be the biggest losers.
About The New York Hedge Fund Roundtable:
The New York Hedge Fund Roundtable is a non-profit organization focused on promoting ethics and best practices within the alternative investment industry. The membership consists of investors, fund managers and other industry professionals who regularly meet to discuss current issues within the industry and connect with peers. Monthly events center around thought-provoking speakers and panels designed to keep members apprised of timely and important issues within the alternative investment industry. The Roundtable’s goal is to provide a forum for thought leadership, where industry professional have the opportunity to enhance their knowledge and skills and to network with other individuals committed to advancing the industry with the highest ethical standards. For additional information about the Roundtable, visit: http://www.nyhfr.org
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