LinkedIn's bull ride raises fears

The LinkedIn valuation is making people proclaim that the markets are on the cusp of another tech bubble.

What are shares of LinkedIn really worth?

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 per cent 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 per cent 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 that zoomed 354 per cent on its debut in 2005, with Nymex at 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 per cent in the first quarter.”

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.

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.

The big question is whether LinkedIn can become the next Google or Amazon.

©2011 The New York Times News Service