Jim Cramer was right when he was furious about the LinkedIn Corp’s IPO yesterday. He was absolutely right that the IPO was “outrageously overvalued and preposterous” and that it’s the most ridiculous IPO since TheGlobe.com. Seriously, who can blame him when he accused the underwriters of playing the same game everyone played back in the 1990s during the dot com boom. The way Linked’s share prices pop on the first day of its IPO brings back the dot com memories.
A social networking player, theGlobe.com made headlines on November 13, 1998 when it posted the largest first day gain of any IPO in history back then. The company’s stock price collapsed the next year and the company retrenched for several years before ceasing operations in 2008. Of course going by the crazy buying at market price snapping and pushing up of the LinkedIn stock price to a gain of 170%, nobody would believe the doom of tech bubble is going to repeat itself.
After being priced at $45 in its initial public offering, LinkedIn Corp.’s shares soared more than double to as high as $122.70 (172%) before closing Thursday at $94.25 (up 109%). It was the biggest one-day gain for a Silicon Valley IPO since 2007 and left the online networking company with a $9 billion market value. There’re many happy faces with LinkedIn founder, Reid Hoffman, a former Apple and PayPal executive being one of them. He is now officially a billionaire with his stake in the company worth $1.8 billion, follow by CEO Jeffrey Weiner worth about $213 million.
Already, there’re people calling this IPO the new Netscape IPO for a new generation. It’s absolutely insane that a company with just $243 million in revenues and $15.4 million in profit is now valued at $9 billion. That’s 36 times LinkedIn revenue, compared to Google’s first day of trading in 2004, which gave the search giant a valuation of 5.5x revenue only. But LinkedIn is no Google but a job board company just like JobStreet or Monster with users interaction thrown in. Heck, how may of its 100 million users are actively looking for job?
Now, how come people were so crazy chasing the stock as if the shares is the ticket to travel to Mars? In a nutshell, the fact that lead underwriter Morgan Stanley sold very little shares (7.84 million shares) contributed to the squeeze that everyone was rushing for it. The second reason is because, well, LinkedIn is the only public traded social media stock to choose from right now. Still, that should not be the reason to stupidly jump onto the bandwagon because at $95, LinkedIn stock is trading at P/E of 2,461 of its FY2010 normalized earnings of $0.0386. And LinkedIn lost money in 2005, 2006, 2008 and 2009, mind you.
Interestingly, using Quantitative Screen of the ZYX Change Method to calculate LinkedIn shows the fair value of LinkedIn to be $35.00. Maybe the stock would come to this level after other social networking players go public. Others waiting to jump in are Twitter Inc., Zynga Inc., Groupon Inc. and of course Facebook. Facebook which is speculated to float by Apr 2012 is now said to be influenced by LinkedIn’s IPO craze and would like to cash in earlier than that. Given choice, Facebook would like to go public next week to take advantage of the craze.
Being first of its kind definitely pays and LinkedIn should thank itself for being the first social networking to come out of the gate. Should Facebook came earlier, LinkedIn would not have such luck. With more than 600 million users, Facebook users spent an average of 309 minutes on the site as compared to LinkedIn’s 16 minutes. Nevertheless the billion dollar question: Is this the start of another tech or dot com bubble? Hopefully not. For one thing, fewer companies go public and if they do, they tend to have some sort of track record of revenue growth and profitability as compared to those that went public in the late 1990s.
Besides LinkedIn employees, the venture capitalists have their big windfall as well. Sequoia Capital, which led a $4.7 million investment in 2003, now owns 17.8% of the company and that stake was worth about $1.6 billion. Greylock Partners, which led a $10 million funding in 2004, now has a stake worth around $1.3 billion while Bessemer Venture Partners who owns a 4.8% stake after it led a $12.8 million investment in 2007 is now worth $430 million. Too bad LinkedIn is not optionable otherwise we could make some money out of it with lesser risk.
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