Bubble Bauble: LinkedIn’s IPO Goes Nuts

by Jordan Richardson on May 23, 2011

Reid Hoffman founded LinkedIn in 2002 and launched it in May of 2003. The business-0riented social networking site reports over 100 million registered users, most of which are professionals in some capacity, in over 200 countries.

In January of 2011, LinkedIn filed for initial public offering (IPO). By May 19, 2011, the first shares were traded on the New York Stock Exchange.

The results of the initial round of trading were, in a word, incredible. Investors wanting to get in on the ground floor of the social networking boom couldn’t wait for Facebook or its fellows to start trading publicly and hopped on the first option. While shares, initially priced at $45 a pop, doubled upon landing on the market, some analysts warned that the situation could be akin to what occurred in the late 1990s with the dot-com bubble.

The thing is that almost every venture investor has been waiting for a social networking opportunity to lock in to. Other social networking companies, even those tailored to a more specific niche like LinkedIn, could presumably see what occurred here as a good sign to take their dog and pony shows to market as well. As they go public in a hurry, it’s possible that the effects could be less than desirable.

“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.

But there could be a very key difference between this potential bubble and the dot-com scenario: LinkedIn isn’t just relying on potential page views, hits or public awareness to generate revenue. “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. “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.”

Other social networking and Internet properties could be following suit in short order, with coupon site Groupon among those in the running. And there’s big money to be had in the right avenue, with Groupon having raised $1 billion from investors in January and prepped to consider an offering that could value the company at a modest $20 billion.

At the heart of it all is the “implied valuation” for sites like Facebook. Had the social networking behemoth not been “valued” at as much as $80 billion or so over the last while, nobody would be rolling the dice on LinkedIn or Groupon.

Investors are wagering that LinkedIn cuts a sizeable profit. With shares trading at around $93, the hope is for the company to generate a rise of $4 billion in revenue in five years. Even with a “freemium” revenue model, it’s going to be hard to drive that kind of money.

LinkedIn charges businesses and recruiters for hiring, too, but it faces a load of competition from established names like Monster. Can it hang with established market names and still push revenue figure upward? Or will this instant billionaire be a harbinger of doom for hopeful investors?

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Written by: Jordan Richardson. www.digitcom.ca. Follow TheTelecomBlog.com by: RSS, Twitter, Facebook, or YouTube.

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