LinkedIn Corporation (LNKD), the social networking company geared to professionals, launched its IPO yesterday with a huge bang. The stock opened up for trading at $83 compared to its IPO price of $45 per share. Within a couple of hours the stock hit $122.69! That’s an increase of 172% from its $45 price! The stock closed at $94.25 per share at the end of its first day of trading.
The price gives the company a whopping valuation of $8.91 billion, for a company that had a net income of just $15 million in 2010, on revenues of $243 million.
On a very thin base of earnings, investors propelled its value from a mere 206 times its 2010 earnings of $0.17 a share to 584 by the end of the day. Thatís 37 times the market average P/E of 16. Itís hard to imagine that the company will ever earn its way into a valuation of 584 times earnings.
Will LinkedIn be able to sustain this valuation and grow like a Google? Or are these prices a result from an over-excited market which will ultimately lead to a lower valuation?
LinkedIn, founded in 2003, †is the world’s largest professional network on the Internet with more than 100 million members in over 200 countries and territories, which currently includes executives from every Fortune 500 Company. The company, with headquarters in Mountain View, California, has a diversified business model with revenues coming from member subscriptions, advertising sales and hiring solutions.
With a valuation similar to LinkedIn, Facebook would be valued at $100 billion and social buying site Groupon would be valued at $20 billion. Where LinkedIn has 100 million members, Facebook has 600 million. At $100 billion, Facebook would be worth more than twice the value of General Motors (GM), 66% more than Home Depot (HD), and 17% more than McDonald’s (MCD).
Apart from Facebook and Groupon, other internet companies that could soon make plans for an IPO are Twitter and Zynga.
There is a huge difference between debt-fueled and equity-fueled bubbles. When the debt-fueled bubble burst in 2008, it destroyed $30 trillion in wealth. In comparison, the bursting of the 1995 to 2000 Internet Initial Public Offering (IPO) bubble wiped off a relatively paltry $6 trillion. It seems that IPO bubbles leave some value in their wake.
Are we heading for another Internet bubble?