The Next Pets.com
Today I come with an important warning.
IPO-Mania has once again gripped the technology sector.
Investors participating are going to get BURNED.
Do NOT be one of those investors.
It’s 1999 all over again for absurd tech IPO valuations.
Today, we’re going to take a quick trip down memory lane for a valuable lesson from history. Then I’m going to name a specific stock that you must avoid.
Pets.com — The Poster Child of the Dot.com Bubble
Out of all the companies that went bust during the Dot.com bubble, likely the most infamous of them all was Pets.com.
Like many other e-commerce retailers, Pets.com was launched with the intention of dominating its respective niche — selling discounted products online to pet owners.
Pets.com was launched in January 2000 with a hilarious $1.2 million Super Bowl advertisement that USA Today ranked as the top ad for the entire game.
The advertisement gave the company national recognition.
The Pets.com sock puppet that appeared in the ad even later appeared on Good Morning America and in People Magazine.
On the back of this momentum, the company IPO’d in February 2000 under the ticker IPET at $11 per share.
Like everything Dot.com-related back then, the IPO was well received. During the first day of trading, IPET raced from $11 to $14.
At that share price, the market valued this business (which was nowhere close to turning a profit) at more than $400 million.
It was all downhill from there.
During its first fiscal year, Pets.com generated all of $619,000 in revenues while spending $12 million on advertising and paying the salaries of more than 300 people.
Ouch… that sucking sound was cash going out the door.
With operations burning massive amounts of cash from Day-1, this company (and its stock) went into a terrible spiral.
History shows that Pets.com went from IPO to a $400 million market valuation to bankruptcy in just 268 days.
Investors who owned Pets.com shares lost everything.
Pets.com is Back — This Time Its Name is…
Back in May we first warned readers that IPO-Mania had returned to the tech sector.
We noted how in 2018, the percentage of venture capital-backed IPOs that were actually profitable tallied only 16 percent — a level not seen since the Dot.com mania of 2000.
This is an area of the market that must be avoided today.
There is no clearer evidence than the stock that I consider the second coming of Pets.com: recently IPO’d Chewy (CHWY).
The company described its business in its IPO registration statement as:
Our mission is to be the most trusted and convenient online destination for pet parents everywhere. Since our launch, we have created the largest pure-play pet e-tailer in the United States, offering virtually everything a pet needs.
Folks, that description could very well have come from 1999. This company literally is the second incarnation of Pets.com!
Incredibly, many investors are oblivious to the fact that owning shares of Chewy is just as risky as owning Pets.com back in 2000.
In fact, the risk posed by Chewy to investors is even greater.
While the peak stock market valuation of Pets.com was $400 million. Today the stock market is valuing Chewy as being worth a staggering $13.5 billion.
This means that Chewy is valued 33 times Pets.com’s richest valuation.
And just like Pets.com, Chewy is nowhere close to turning a profit.
This $13.5 billion valuation is for a company that analysts believe might first eek out a profit in 2023… if everything goes according to plan.
Sounds unlikely considering how cutthroat today’s e-commerce industry is… (Amazon anyone?)
IPO-Mania has gripped the entire technology sector and it is clear that investors should run — not walk — away from shares of Chewy.
For much better investment alternatives, stick with us here at The Daily Edge. We have plenty of great ideas coming your way.
And I promise that they will be attached to highly profitable, cash generating businesses.
Here’s to looking through the windshield,
Financial Analyst, The Daily Edge