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.
For those that bought linked in at these prices I hope they have a parachute handy—it’s simply not worth it and this discussion demonstrates why. The valuation is completely obscene based on its revenues and potential revenues. The pressure will be on very quickly for them to validate this price and quite honestly they just can’t do it. This is a prime example of a stock run based on emotion not on sound research and understanding of their business model. Hopefully this won’t signal another “me too” tech bubble IPO run as we had in the past. Its too bad these investors didn’t read the obit of the net bubble part 1.
I just read that Linkedin had a security flaw that makes users accounts vulnerable to hackers. I don't know whether this is just a rumour to influence the stock price or an actual threat. LinkedIn cookies are supposed to be saved in a user's computer for a year once a user enters his user name and password and this makes the account vulnerable to hackers. Usually banks and most institutions log users off after five to ten minutes and most cookies expire in 24 hours.
If this is actually true how will this affect the current offering?
Amen, Value Hiker! It really is all about the vision and the ability to pull off the paradigm shift. Your examples of NetFlix and Amazon are excellent because not only did they leave their competition (i.e., Blockbuster, Barnes & Noble, Borders) in the dust; they have been evolving so as to leave themselves in the dust!
When I look at NetFlix as it is now positioned to stream media, and when I buy everything including the kitchen sink from Amazon, I just marvel at how they continue to move forward while maintaining the constant of outstanding customer service.
Meanwhile...remember MySpace? Or even eBay? They feel like they missed the boat somehow to me, that they lost touch with their customers and have failed to evolve in the same way.
I think what I was trying to say in my earlier post is that right now LinkedIn is a small, well-run company with lots of potential. I'm not sure ANYTHING about it justifies its current price, but for it to someday grow into its valuation, it would need to take its offerings in wholly new and unanticipated directions.
It will be fun to watch and see what management has up its sleeve, but I, too, plan to watch from the sidelines.
Investing is about business, business is about people. My comments is purely based on the numbers. Unfortunately numbers can not predict the the future, it only records what happened in the past.
Is there any chance that LinkedIn can greatly improve its intrinsic value, that make $100 per share looks cheap? Yes, there is. I tracked NetFlix from the right beginning after its IPO, I did not believe it can beat BlockBuster, I did not believe it can successfully change itself from a retailer to a high tech powerhouse. I was wrong many times by under-estimating the magic power of great entrepreneurs like Reed Hastings, Jeffrey Bezos, and Steve Jobs.
However, I never regret on these mistakes, because for each Reed Hasting, there are many more guys who appeared as a real prince, turning out to be a true toad. Until I have the power to tell the difference between the prince and toad. I won't touch any of them. :)
I love this kind of patient "just the facts, ma'am" kind of analysis @Value Hiker! And you are absolutely right that unlike Facebook (where my dog has a profile), the legitimate, professional population of LinkedIn is very self-limiting and very USA-centric.
But just in terms of using LinkedIn, I haven't really drunk the Kool-Aid yet. I think the big transition that LinkedIn will have to make will be from a career/job hunting site to more of a lifestyle one if it is really to move to the Facebook level of ubiquity in our lives. It will be interesting near term to see if the IPO publicity results in a substantial increase in the number of users.
It's exquisitely ironic, but I swear the MOST posted story I've seen on Facebook in the last twenty-four hours has been about LinkedIn, namely Joe Nocera's New York Times editorial, Was LinkedIn Scammed? Friends of mine who normally post pictures of their recipes, graduations, dogs and horoscopes are ON FIRE about this story relating to the IPO!
You can read it for yourself if you haven't already, but in it Nocera argues that the gap between LinkedIn's IPO price of $45 per share and where the stock actually opened for trading at $83 was proof positive that investment bankers haven't changed their predatory ways AT ALL since the dark days of 2008.
Well, I'm not a defender, but I AM a contrarian! I'd just like to examine a couple of Nocera's premises:
First, he points out that the deal as capitalized sold 7.84 million shares and raised $352 million, which garnered the banks a 7% deal fee. So, their incentive to price the deal low was WHAT again? Isn't 7% of a bigger number MORE for them?
Nocera seems to imply that the BIG incentive that the syndicate had was to allow clients of the firm to reap the trading profit associated with the spread. Well, I don't know what the allocations were, but by the time all of the firms in the syndicate got their take-downs and then spread those out among all of the thousands of clients who wanted just even a few shares, I don't think there was any massive money to be made by any single client. Sure, it would have been fun to have the stock pop and be able to flip it, but we're not talking big money here.
And, LAST but MOST IMPORTANT, that money would NEVER have been big enough or those clients important enough to justify the fact that now NO ONE--and certainly NOT FACEBOOK--is going to be picking Morgan Stanley or B of A/Merrill as their lead underwriters any time this century.
I'm all for conspiracy theories, but let's keep turning over rocks shall we?
I read the S1 filing Of LinkedIn. Here is some thoughts about this hot IPO.
First of all, based on 2010 net income (about 10M), LinkedIn 9B market cap means its P/E = 900. If you use Ben Graham's simply formular P/E = 8.5 + 2g => g = 445, so people buying at $90 basically expect Linked in will have a long term growth rate of 450%. From LinkedIn S-1 filing, its growth rate is about 92% from 2007 to 2009, and the management clearly said that even 92% rate can not be kept in the future.
2. According to Linkedin S-1 filing, the company already has 90M members, how many professionals we had on this earth, excluding children, retired, uneducated, and hourly workers, I bet at most 1B professional lived on this world, who can be the potential users of LinkedIn
3. Don't forget people in foreign countries they have their own Professional networking companies. German has Xing, France has Viadeo, Japan has Mixi, China has Jinwei, etc. LinkedIn had a hard time to get into these markets, and a hot IPO will not change the situation. This means maybe more than half of 1B will never be LinkedIn customer anyway.
4. This left LinkedIn with Less than 500M potential customer, not that bad. Unfortunately, in S1 filing, linkedin clearly stated: "The number of our registered members is higher than the number of actual members, and a substantial majority of our page views are generated by a minority of our members", put it in plain English, most current registered users are not active user at all. Dormant users won't create revenue for LinkedIn since nobody want out of date information. The inactive ratio will be even higher for these future potential users (500-90=410M).
In a short, LinkedIn don't have that big growth potential to justify its current valuation. I don't know if current price is carzy, but it is definitely way too high. Investors buying yesterday were playing the greater fool game again
Yeah, yesterday I wrote that it wasn't quite as crazy as 1999. Well, North of $100 it's getting there. I just could not buy this company with a $9B market cap with only $400 million in revenue before it has even announced its first quarter as apublic company!
For those that got an IPO allocation at $45... congratulations. Serious funny business going on.
Remember irrational exuberance? Well, I think that's what we're seeing a glimmer of with LinkedIn's meteoric rise from the offering price so I'm not REALLY sure we should make too much of the first day's trading as a trend. Don't forget, in geometry you need TWO points to draw a line!
First of all, only day before yesterday, the $45 offering price was looked at as the high end of the range; $30 was discussed with a perfectly straight face. Second, the LinkedIn management took pains yesterday to stress their fundamentals and laugh off the "tulipmania" of the early trading. I think they'll be wanting to hold on to that sanguine point of view in the days and months ahead because, third, as the New York Times points out, the only real parallel (and it's not a great one) for a similar IPO and resulting fantasy valuation is Open Table last year.
So back to irrational exuberance... My theory about why LinkedIn was SO popular yesterday? Because investors are looking for something, anything positive, bold and exciting these days. Anything that seems to emerge from the pack and from the doldrums and proclaim, "Here's a new direction!"
We are STARVED for pizazz AND starved for substance. The syndicate that priced that IPO priced (and let's remember how respectable $45/share is) it on substance-a company in existence for eight years, an earnings track record, good management, AWESOME database and potential reach. Yesterday's trading premium was the pizazz premium and we'll see where that goes as things settle down.
Meanwhile, monitor those restricted stock sales in the months ahead. That'll tell us A LOT about the size of the gap between pizazz and substance.
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