LinkedIn: A New Era or a Bubble?
You could feel the excitement on the floor--the huge crowd, the media...and LinkedIn did not disappoint, opening at $83 after pricing at $45, an 84 percent pop.
Is it a bubble? That's what we have been talking about all morning on the air.
1) First, and most obviously, this is an allocation mismatch—only 7.8 million shares were floated, about 8 percent of the company. That was well below demand. Had they floated 30 percent of the company (about 32 million shares) the stock would have likely opened much lower, say, $45-$50, we would have noted what a nice open it was but certainly would not have used the word "bubble."
2) Don't revenues matter more than profits? For the moment, yes. But only for the moment.
The real source of revenues is advertising, but these companies are developing other revenue streams. LNKD for example, half of its business comes from recruiting—recruiters pay LNKD an annual licensing fee to get premium access to users—they are essentially a low-cost platform for headhunters. Are they stealing share from headhunters? Seems to me it's a tool for headhunters.
For LNKD, as long as they are putting up growth numbers, investors will probably give them a break. For a while.
2010 revenues for LNKD: $243 million. A reasonable estimate for 2011 might be $400 million, for 2012...who knows? Certainly traders are expecting above 50 percent revenue growth...so maybe $600 million.
That's a lot of growth. They have shown that the business has scale. They are investing in growth at the expense of profits. They could have slower growth, with higher profits, but that obviously is not a priority.
But don't kid yourself: at some point—likely in the next year or two—investors are going to focus on profitability.
3) How is this different than the dot.com bubble? Companies get much less slack than they did in 1999, much less time to show that they can make profits. During the dot.com bubble, none of the company's made money, so there were alternate valuation metrics used: price-to-sales, and my personal favorite: price-to-eyeballs.
But suddenly--in mid-2000, investors simply demanded (en masse!) that companies show they had a clear path to profitability. Many could not and simply evaporated.
The bottom line: the bottom line does matter.
Another point on the dot.com craze: by bubble standards, LNKD's up 84 percent at the open is small potatoes compared to the old dot.com days. I know—I was there.
When did the dot.com bubble start? Hard to pinpoint an exact date—some would start with Netscape in 1995, but let's take eBay's IPO. It was September 24, 1998. eBay priced at $18, opened at $53.50, closed at 47 3/8--a 163 percent pop on the opening day. In Mid-November, EarthWeb priced at $14, opened at $40, closed at $48 11/16—247 percent.
Looking back, that October and November of 1999 is when the floodgates opened, topped by the mother of all first-day IPOs: Theglobe.com on November 12. Priced at $9, opened at $90 (!), closed at 63 1/2, a 605 percent gain.
In that short period at the end of 1999, we saw Akamai , Cobalt Networks, FreeMarkets, MarketWatch.com, webMethod, FoundryNetworks, VA Linux, all go public, all opened up 500 to 600 percent on the first day of trading.
4) Is this going to happen again with all the social networking sites? I would not bet on it.
Investors are likely a lot smarter than they were in the 1990s, when anything dot.com blew up on the first day of trading.
It is likely these kinds of lofty valuations will be reserved for a small group: Facebook, Twitter, Groupon, a few others. And then there will be everyone else. In a hot IPO market, the second tier will be lifted, but not nearly as much as the first tier.
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