May 20, 2011

LinkedIn IPO craziness. A new giant? Or the start of a 2.0 bubble?

Yesterday's (19th of May) session at Wall Street was a much anticipated one. It was the day LinkedIn, dubbed the 'professional social network' went public. Initially valued at 43.5$ per title, which would have roughly added to a $4.1 billion valuation, it was already a high enough price for some. But the demand for the stock was overwhelming and it astonishingly skyrocketed during its first session, reaching a peak of +160% during the day, to finally end the session at almost +110%. That left LinkedIn valued at 94.25$ per share (NYSE:LNKD), or if you prefer it, a total market cap of $8.91 billion!

The behavior of the LinkedIn stock on its first session ever shows a renewed appetite for tech companies, which is good for the market, but honestly I find it to be a quite unrealistic performance. It says more about traders looking for some lonesome bulls in the middle of the last week's reigning uncertainty, than about the real short-term prospection of the company. But do not let the stock price fool you into thinking LinkedIn is a one-day flower, its future looks bright, with a first quarter 2011 revenue of $94 million, more than doubling the same period of 2010 ($44.7 million), and having surpassed the 100 million registered users milestone. 

LinkedIn has shown that social networks can truly be monetized, something Facebook and Twitter have been unable to do, and the main reason why both of them are not still publicly traded. Although you can count on them going public in a not-so-far away future... 

LinkedIn (LNKD) graph from 1st day on NYSE. Credit: Google Finance


They say knowledge is power, and there is no doubt that social networks have an enormous wealth in the form of personal information and other data, but there is no direct formula to turn this knowledge into money. LinkedIn, thanks to its professional incline, seems to have found the magic formula and just so you know it is the following: 33% revenue comes from advertising, 21% comes from selling premium subscriptions and the rest comes from services to companies and headhunters.

My doubts do not come from LinkedIn's future, but from the reaction of the market to its IPO and the precedent it creates given the late eagerness to invest in internet firms like Twitter, Groupon, Baidu, Yandex, Facebook... regardless of them being viable companies economically or not.

The market seems to be on a constant search for the next bubble. On few (economically-speaking) years, we have lived through the first housing bubble, the dotcom bubble, yet another housing bubble and the most recent commodities rally (I am not convinced we can call that a bubble because of the nature of the goods affected). But instead of learning from past errors, the market seems to keep looking for the following bubble; and it seems to have found the perfect match in tech companies again. In fact, a recent poll on the Wall Street Journal shows almost 75% of voters think the LinkedIn IPO marks the start of a new tech bubble.

Keep something in mind, the world is not ready for another bubble. And more importantly, I am not sure some contenders in the financial markets would have the strength to withstand the crash of another bubble.


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