What Zillow and SkullCandy Tell Us About This Tech Bubble

We have two new data points in the development of the tech bubble today: the IPOs of Zillow (Z) and SkullCandy (SKUL). Shares of Zillow, which provides estimates of property values, immediately doubled. SkullCandy, which makes headphones, iPod cases and brandedbapparel, also saw shares jump, though a much smaller one.

More bubble fodder? Yes, but. Sure, investors are demonstrating the same greedy hunger for any tech IPO we saw more than a decade ago. However, unlike the major nonsense back then, at least some of the new crop of startups actually know how to make money and -- gasp! -- even profit.

Zillow is location, location, location
At a first quick glance, Zillow seems like a classic bubble sort of company -- i.e., one that counts on advertising to supported its free information services. The company likes to discuss "adjusted EBITDA" more than gold-standard GAAP financials. Operational numbers from the S-1 show a steady diet of losses (click to enlarge):

Furthermore, the company and existing shareholders released only 11.4 percent of the stock -- a low-float IPO that had investors thrashing through the market waters like crazed piranha in order to score a few shares. But a second look shows that Zillow may be in better shape than it seems.

The company has indeed been losing money since it started. But revenue is ramping up far faster than total costs and expenses. Between 2008 and 2010, revenue rose by a factor of nearly 2.9, while expenses only grew by 14.8 percent. The first quarter of 2011 saw revenue more than double year-over-year, but again, expenses grew by less than 50 percent. Unique users also continue to grow rapidly (click to enlarge):

At this rate, it doesn't seem that it would be long before the rate of revenue increase outpaces that of cost increases and the company becomes profitable. Imagine that.

Can you hear them now?
SkullCandy seems a less likely bubble candidate. The company and its investors offered almost a quarter of outstanding shares to the public, so its stock-price jump wasn't the result of artificial scarcity. It likely has more to do with the statement of operations (click to enlarge):

Other than last year, the company has been profitable, though it looks as though it's struggling with marketing and administration costs. Net sales roughly doubled from 2008 to 2010, while SG&A expenses, including marketing, were up 275 percent. Still, the first quarter of 2011 shows greater than 50 percent gross margin on sales of headphones.

What the company also has going for it is a strong brand, particularly among kids and younger adults, which helps maintain margins and, ultimately, profitability.

Maybe this helps illustrate the differences and similarities between the original tech bubble in the late 1990s and early 2000s and what the market sees now. Back then, too many people bought a lot of hogwash about the fundamental nature of business and economics having changed. It wasn't true. Companies that hadn't focused on both raising sufficient capital and creating a business model that would ultimately create revenue and profit soon became history.

A new kind of bubble
What we see today is still a bubble, but of a different sort. Companies are focusing on fundamentals, even if some, like Groupon, don't seem to be making much headway in becoming profitable. However, investors are so desperate to put their money into something that they think will grow, they latch onto opportunities. In doing so, they drive up share prices, which then act as further "proof" to the ravenous of the worth of the companies.

Over time, the insane multiples we're seeing will die down. People will realize that stock prices do eventually require performance to match. There will be many disappointed investors who will swear about the market and how much money they lost and the few early investors who made a killing at their expense. But unlike the last time, many of these companies will continue to grow and make money rather than suddenly close, putting everyone involved out of work.

Related:

• 8 Things You Didn't Know about Facebook and Zynga
• Zynga IPO: Real Profit Puts Zing in Its Public Offering
• Zynga to Stoke the Tech Bubble with a Low-Float IPO