Eleven years ago, I was writing for a hot magazine and Website called Red Herring, chronicling the rise of Internet stocks and blockbuster IPOs. It seemed as if there was a new multi-billion dollar IPO every week, and we were churning out articles like donuts on the assembly line, just like the IPOs. Today's stunning LinkedIn Corp. IPO certainly conjures up such memories. Is it the same story?
The short answer (hedged): Yes, and no. LinkedIn received a generous valuation today. It's now sporting an $8 billion market capitalization. Shares were priced at $45 but immediately started trading at $83 or so, leaving about a $40 gap between the opening price and the first trading price. (This is known, in the IPO business, as "leaving money on the table" -- traders, insiders, and banks, rather than the company raising the money in an IPO, make the money on this price differential.) People who bought shares on the secondary market just months ago at $4 billion valuation are happy. They've doubled their money in a quick flip. The venture investors are ecstatic.
The LinkedIn IPO now ranks in the top ten Internet IPOs of the last decade, raising about $353 million after the company sold 7.84 million shares at $45. The top Internet IPO of the last ten years was Google (Nasdaq: GOOG), with its $1.9 billion IPO in 2004.
The market-cap math certainly brings back memories of 1999, though it's not quite as extreme as a time when companies with no revenue achieved tens of billions in market capitalization. At least LinkedIn will book around $400 million in sales this year and has booked some small profits so far. LinkedIn now has a market capitalization greater than 136 other S&P Index companies do, according to Bespoke Investment Group. Bespoke also notes that LinkedIn is comparable in market capitalization to Chipotle Mexican Grill (NYSE: CMG), with a market capitalization of $9 billion.
The best valuation comparison I have seen with LinkedIn is Expedia Inc. (Nasdaq: EXPE), which has $3.5 billion in revenue and about $400 million in net income. That gives it a price/sales ratio of about 2 times revenue. In contrast, it looks as if LinkedIn will have a price/sales ratio of close to 20. LinkedIn booked nearly $100 million in the first quarter of 2011, giving it a run rate of about $400 million of revenue for 2011. In other words, Expedia has more profit than LinkedIn has revenue, but it has a smaller market capitalization.
So the valuation makes us think of 1999. But some things are different.
While Internet companies were stamped out and IPO'd in shorts spans of time in 1999 -- sometimes the life-span of a pre-IPO venture company back then was as little as two years -- LinkedIn, in many ways, is already a mature and battle-scarred company. It has earned its right to IPO, unlike many of those 1999 companies, which merely got lucky.
LinkedIn is eight years old, and it's experienced several twist and turns. It was hardly ever a slam dunk, having undergone management changes, business-model tweaks, and revitalization under current CEO Jeff Weiner. Five years ago, you could not have imagined such a glorious IPO for the company. Founder Reid Hoffman has certainly seen a lot in the eight years since he founded the company. In 1999, two-year-old outfits were minted at multi-billion dollar valuations nearly every other week, and many of them didn't even have revenue. So certainly, that aspect is different.
Of course, valuing Internet companies after an IPO is a tricky business. But hindsight is 20/20. Take Yahoo Inc. (Nasdaq: YHOO), for instance, which once had a valuation of more than $130 billion. It's now worth $20 billion. But as another example, look at Google. Many experts said it was overvalued at its IPO with a market-cap of $27 billion, a real jaw-dropper to some. Google's now worth $170 billion, nearly seven times its value at the time of the IPO. Of course, you can say, "But it's Google." But did you say that back then? The point is, it's hard it is to gauge the potential growth of Internet companies and decide whether you are overpaying during an IPO.
And if you think 1999 was a total, unmitigated disaster, think again. It was only terrible if you methodically bought companies at their highs. But what if you want shopping in 2001? Some Internet companies, such as Priceline (Nasdaq: PCLN) and Amazon.com Inc. (Nasdaq: AMZN), are more valuable than ever before.
So, yes, the LinkedIn valuation is rich. I couldn't stomach paying for shares at today's price. But LinkedIn, unlike many Internet fly-by-night operations of 1999, is a real company with a long history and a proven user base. How do I handicap its success? I give it 2-to-1 odds of reaching $5 billion revenue some day. It could be as big as, if not bigger than, Yahoo, with its $20 billion valuation. But these are Vegas-like odds. That's the only way to look at Internet company investments.
Would I buy LinkedIn shares now? Nah. Too rich for my blood. It doesn't meet my valuation discipline criteria, and too many bad things can happen. Besides, most IPOs trade down, at some point. There's always an opportunity to get in later.