In a sizzling debut last week on the New York Stock Exchange, investors sent stock in LinkedIn, the social-networking site for business professionals, soaring 109 percent on its first day of trading. While the enthusiasm subsided a tad the next day, LinkedIn’s shares still closed the week at around $93, more than twice the company’s initial offering price. This put the value of the company, which made $15 million in profit last year, at more than $8 billion.
From Wall Street to Silicon Valley, the debate was whether this stunning performance echoed the late 1990s, when the bubble around dot-com companies began to inflate. On its first day of trading in 1995, Netscape stock doubled in price. Yahoo shares rose 154 percent on its 1996 offering. TheGlobe.com shot up to $97 from $9 in its first day of trading in 1998, giving it a valuation of about $850 million.
LinkedIn’s first-day trading gain was the fifth highest since 2001, but the top three were Chinese Internet stocks like Baidu, which zoomed 354 percent on its debut in 2005, with Nymex No. 4.
“In both cases, the Internet bubble of the late 1990s and now, investors are assigning some very optimistic valuations,” said Jay Ritter, a professor of finance at the University of Florida.
Still, many people are hesitant to proclaim that the markets are on the cusp of another tech bubble or that the markets are returning to the days when unprofitable new companies could be valued at billions of dollars. In those days, companies without earnings were assessed with measurements like “eyeballs,” the number of people who visited a site; “stickiness,” how long they visited; and even “mindshare,” how aware the public was of the company or category.
“LinkedIn is not a company you have to value on page views. We’re not talking about a start-up here,” said Matt Therian, a research analyst at Renaissance Capital, based in Greenwich, Conn. “This is a company that grew revenues by 110 percent in the first quarter and, on top of that, it’s actually turned a profit.”
By far, the hottest segment of the Internet market is social media companies. The social buying site Groupon, which raised $1 billion from investors in January, is said to be considering an offering that could value the company at $20 billion.
And the barometer for the segment, Facebook, which is widely expected to go public next year, has rocketed higher in the private secondary markets with its shares trading at an implied valuation of as much as $80 billion in recent months.
As the first social media company out of the gates into the public markets, LinkedIn benefited from all of the attention Facebook has ginned up.
“Do you really imagine that LinkedIn could have gotten this valuation if not for the excitement of Facebook?” asked Kevin Landis, the chief investment officer of Firsthand Funds, which rode the tech boom and bust a decade ago. “I don’t know anybody who could make that case.”
LinkedIn’s valuation, many analysts say, is partly a function of investor demand for all things social media but also related to the fact that a limited number of shares — nine million — were issued. Those shares traded 30 million times in the first day.
Initial public offerings remain rare now, and this scarcity can drive up prices. Only 154 companies went public in 2010, and 63 have so far this year, compared with 486 in 1999.
Of course, the big question is whether LinkedIn is destined to become the next Google or Amazon, or whether it is another TheGlobe.com, which was a penny stock by 2001, when the dot-com bubble burst.
At LinkedIn’s current valuation, investors are clearly betting the company will show phenomenal growth, analysts say. LinkedIn is trading at about 554 times last year’s earnings of $15 million (the company posted losses in 2008 and 2009).
That compares with a price-to-trailing-earnings ratio of 149 when Google made its debut in the markets or, in a more extreme example, the 947.5 ratio eBay received in its first day of trading, according to data from Mr. Ritter.
Price-to-earnings comparisons for other hot Internet companies, like TheGlobe.com or even Netscape on their opening days, are difficult as they did not have any earnings.
By another closely watched measurement, LinkedIn is trading at around 25 times this year’s expected sales, said Rick Summer, a senior equity analyst at the Chicago research firm Morningstar.
That’s high, and Mr. Summer says LinkedIn could increase its revenue to $1.5 billion in five years, from $243 million last year. That makes LinkedIn worth about $27 a share, by his estimate.
With LinkedIn shares trading at $93, investors are betting the company’s revenue will rise to $4 billion in five years, Mr. Summer said.
Impossible? No. Difficult? Yes, say analysts.
But that valuation makes sense if an investor believes someone would pay even more for the stock. And that’s how bubbles form.
LinkedIn, which has about 100 million members, does have a revenue model. It offers what is called a freemium business model: users can create free profiles or they can pay a subscription fee for a premium account with special features.
LinkedIn also charges businesses and recruiters for hiring. Although the company is still growing quickly, it faces tough competition from other sites, like the job listing services Monster and CareerBuilder.
The company has repeatedly said it plans to invest in its platform, at the expense of short-term profit, a move that is potentially good for the company over the years, but could make it tough for investors to justify current market valuations, analysts warn.
Mr. Summer said, “We think it’s a very good financial model and a good business, but at these valuations, it’s potentially, ‘Watch out below.’ ”
