All About LinkedIn

LinkedIn, the social networking site for professionals, made a stunning debut on the stock market on Thursday, when its shares more than doubled in price — from an initial public offering of $45 to a closing price of $94.25. It was the largest U.S. Internet IPO since Google debuted in 2004, when the company raised $1.67 billion.

According to the Wall Street Journal, LinkedIn’s valuation by the end of Thursday was $8.9 billion — a figure that some analysts believe is far too inflated for a company that made $243 million in revenues last year. Forbes columnist Eric Savitz points out that at one point during its opening day, LinkedIn’s shares were trading at 41 times the firm’s 2010 revenues. If Apple’s shares were trading at the same level, for example, it would be valued at $2.7 trillion, Savitz notes.

What’s behind LinkedIn’s skyrocketing value? According to Wharton management professor David Hsu, the run-up reflects “optimism about the scalability and value of the company’s business model,” but also the “scarce public access to investing in this category.” He adds that “this is great news” for Facebook, Twitter and others, “from the standpoint of understanding demand for these elite social media companies and associated valuations.”

Wharton finance professor Luke Taylor agrees. “For a long time, no one has really known how much these social media companies are really worth. The secondary markets have given us some noisy signals, but they’re just that. The market has finally told us how much LinkedIn is worth, which tells us something about how much similar companies like Facebook and Twitter are worth…. I’ll speculate that this news will make their IPOs happen sooner and happen bigger.”

In fact, Taylor notes, LinkedIn’s IPO must have surprised even its underwriters, who likely didn’t foresee the level of investor interest and therefore didn’t price the IPO as aggressively as they could have. By not pricing the stock at, say, $85 a share, instead of $45, “the underwriters ended up leaving roughly $300 million on the table during the IPO. Is that a lot of money for LinkedIn? Well, it’s more than LinkedIn’s revenue last year. However, if the company is currently worth $10 billion, then $300 million is just 3% of the company’s value.” One overriding benefit of the IPO, he adds “is that it brought LinkedIn lots of media hype, which may help them win more customers.”

Many analysts fear that LinkedIn’s current valuation is a sure sign that a second tech bubble is emerging, but Taylor doubts that is true. “It’s hard to know whether there is a bubble, even after the fact. I’m still not convinced there was a bubble in 2000.” According to Hsu, however, “a lot hinges on whether these [numbers] truly reflect the value that these companies have or will create. In the case of LinkedIn, for example, will labor and employment markets become more efficient in ways which would not otherwise take place in the absence of the company? And is the company well positioned to capture that value it has created? Time will tell.”

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Accessed [September 02, 2014]. [http://knowledge.wharton.upenn.edu/article/all-about-linkedin/]


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