The tech industry has hit Wall Street hard in the past couple of years with several IPOs. The trend is continuing as Facebook, the world’s largest social network, is expected to complete its initial public offering very soon.
Although many think that these IPOs legitimize areas such as social networking and gaming, there are some questions in terms of the impact on the market. According to Vitaliy Katsenelson, the Chief Investment Officer at Investment Management Associates and author of The Little Book of Sideways Markets, some of these companies are trying to shift the power from the shareholders to the CEOs.
For example, Facebook recently acquired Instagram for $1 billion without much input from the company’s board. As Katsenelson explained, Facebook bought a non-profitable company for an inflated price.
While this type of behavior is very different from what the market is accustomed to, he told us that it may work for the short term. However, for the long term, Katsenelson said investors would demand that businesses make decisions that ensure a “genuine cash flow.”
Does this mean Facebook and other tech companies face a rough road ahead? What do you think?