Even LinkedIn’s bankers underestimate the hype
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Richard Beales
It looks as if even LinkedIn’s bankers underestimated the hype. Based on the doubling of the stock on its debut, underwriters left as much money on the table as they harvested for the professional social network and its selling shareholders. But if the hype doesn’t wear off soon, the scarcity value of social network investments surely will.
LinkedIn’s market value soared to more than $9.5 billion by noon on Thursday — topping $100 a share, more than double the $45 initial public offering price. Underwriters, in this case Morgan Stanley, BofA-Merrill Lynch and JPMorgan, like stocks to pop but they usually have 10 percent or so in mind. This kind of gain, fueled by sentiment seemingly divorced from fundamentals, harks back to the dotcom boom of the late 1990s.
Indeed, a $9.5 billion market cap is around 39 times last year’s sales (a metric Internet boosters are trotting out to justify valuations). To get there with any kind of rationality, investors must think LinkedIn is a winner along the lines of online restaurant reservation firm OpenTable OPEN.O, which went public in May 2009 and is now worth more than four times its IPO price. But even OpenTable’s $2.1 billion value today is only 38 times its sales in 2008, before it went public. So it’s possible to argue that even for believers LinkedIn’s stock price is two years ahead of itself.
That kind of optimism is hard for underwriters to price ahead of time. So is scarcity value. For now, LinkedIn is about the first serious online network to go public among Western examples, though Facebook will surely follow, potentially next year. And the shares offered represented less than 10 percent of the company.
There are warnings to be found, though, in other deals. Chinese Facebook clone Renren, itself touted as a rare social networking gem, went public in early May at $14 a share. The price shot skyward on its debut but has since subsided to trade at around the IPO price.
The mixed signals help explain why LinkedIn’s underwriters seem to have missed a trick, and why the company’s bosses and its selling shareholders may not be too bothered. But it also suggests LinkedIn may struggle to maintain such a well-connected valuation once the euphoria wears off — and especially once there are others out there for comparison.