Dot-com Bubble Debate Follows LinkedIn IPO

LinkedIn’s opening IPO price of $83 (£51) on May 19 shocked the high-tech world and spawned another wave of dot-com bubble paranoia that made investment experts, such as Silicon Alley Insider founder Henry Blodget, cringe.

LinkedIn’s gaudy IPO numbers, spurred by giddy investors, recall the days when Pets.com and TheGlobe.com were ridiculously valued in the dotcom gold rush (see graph) before crashing and burning.

Feeling Of Foreboding Among Analysts

Most financial analysts are aghast and running scared. Normally, bullish tech analysts told eWEEK they were also surprised at LinkedIn’s performance.

They believe LinkedIn is showing a market desperate for a social network to publicly trade in. Now people wonder what Facebook, Twitter, Groupon, currently estimated to be worth $75 billion (£46bn), $10 billion(£6bn) and $6 billion(£4bn), respectively, would be worth if they opened up trading to the masses.

“For the average investor, the LinkedIn IPO is a proxy for other investments in the social media space, such as Facebook, that the person-in-the-street can’t currently participate in,” Gartner analyst Ray Valdes told eWEEK.

Added Forrester Research’s Josh Bernoff: “Investors who don’t want to miss out on owning part of the social explosion are definitely buying LinkedIn for that reason. LinkedIn has a bright future, but I worry that this level of run-up – and the inevitable inability to meet these sky-high expectations – will distract the company.”

Count Charlene Li, founder of research firm Altimeter Group, among the LinkedIn IPO cheerleaders.

“It is pretty eye-popping proof but there is nothing else out there, and it is a very valuable stock. It’s professional networking it’s tapping into the recruitment market. People said the exact same thing about Google on its first day of trading. If look at the fundamentals of what it does and how unique it is, the valuation and run-up are absolutely justified.”

Blodget Not Investing

Henry Blodget, no stranger to calling high stock valuations after making his name predicting Amazon.com’s ascension more than a decade ago, summed it up best when he wrote:

“The bottom line is that LinkedIn is a real company with a huge opportunity and no-one knows what the stock is worth. There are scenarios in which the stock will deliver a nice return from this level. There are also (many) scenarios in which LinkedIn will deliver a lousy return from this level – or, worse, incinerate 75 percent or more of investors’ capital.”

Blodget added that he would not touch LinkedIn’s stock at its current level because of the high risk versus the potential upside. Few doubt LinkedIn has upside; the question is: how much of that upside can be justified by the stock price?

LinkedIn had raised over $100 million (£61m) from Sequoia Capital, Greylock Partners and Bessemer Venture Capital Ventures, while Morgan Stanley, Bank of America, Merrill Lynch, and JP Morgan were the lead book-runners for the IPO. Their clients saw an amazing 84 percent return on their investments.

LinkedIn stock reached its zenith of $122.70 (£75.38) on Thursday May 19 before closing at $93.86 (£57.66), valuing the company at just under $8.9 billion (£5.5bn). This came only two months after LinkedIn traded at $35 (£22) in secondary markets such as SecondMarket.

All this for a professional social network with 100 million users that made profit of $15.4 million (£9.5m) in 2010 on sales of $243 million (£149m) from a blend of recruitment services, online advertising, and premium subscriptions.