LinkedIn Gives Social Media Investors Reason For Optimism

In its IPO filing, social networking firm LinkedIn boasted that it adds a new member every second and has more than 100 million members in more than 200 countries and territories across the globe.

On May 19, the company officially went public and investor enthusiasm for getting in on the action caused the price to double within the first few minutes that the stock started trading.

LinkenIn’s History

LinkedIn operates an online professional network that workers can use to network for business and job opportunities. The offering was originally priced at $45 per share and at one point reached almost $123 on the first day of trading. The stock has come back to earth somewhat and recently settled down at just below $80 per share. The current market capitalization is just below $7.5 billion, which appears quite high for a company that is projected to report sales of less than $700 million during 2011 and lose about $0.05 per share as it waits for its vast user base to start upgrading to paying accounts and for advertising-based revenue to really start coming in.

As with the vast majority of dot-com stocks that went public in the late 1990s, investors have become extremely enthusiastic that LinkedIn will grow rapidly and eventually justify the lofty valuation at which it currently trades. A key question rivals have is what this means for their own prospects for going public and how wealthy it could make early investors that include prominent venture capital firms and other early-stage institutional and individual investors.

Social Media IPOs to Come

The first of what could be a wave of public offerings will likely be deal-of-the day email firm Groupon, which made a filing with the U.S. Securities and Exchange Commission detailing its plans to go public. The offer is estimated to raise $750 million and, like LinkedIn, will likely be for only a relatively small percentage of the overall shares outstanding that should also value the firm in the billions of dollars. Last year, Google offered to purchase Groupon for an estimated $6 billion, which is a pretty lofty multiple of the more than $700 million in sales it is estimated to have reported in 2009.

Both of these offerings will eventually be upstaged by Facebook, which back in January was thought to test the publicly-traded waters by April of this year but still has yet to file anything with more concrete details on when it might go public. Other sources pegged an offering at some point in 2012, though the popularity of the LinkedIn offering could persuade it to take advantage of the positive environment for social media firms that have lots of work to do to prove to investors their underlying operations will justify the optimistic valuations.

A Goldman Sachs investment in January valued Facebook at about $50 billion and there have been estimates as high as $100 billion. In other words, it would be a considerably larger deal than either LinkedIn or Groupon. Twitter could also go public in the near future, as could social media game producer Zynga. (For related reading, see 6 Career-Killing Facebook Mistakes.)

The Internet Businesses Go Public

Online music firm Pandora isn’t a social media company, but it just announced plans to raise $142 million in an IPO. Estimates are that sales were $43 million in the first quarter and it lost almost $7 million. As such, it should give some indication on the overall continued enthusiasm for internet-based businesses that go public.

Overall, it’s difficult to say if the surprisingly-high valuation placed on LinkedIn will translate into higher valuations from other internet and social media firms, but it is reasonable to assume that the enthusiasm will quicken the pace of offerings from social media rivals and web-based peers. It could also persuade more firms to consider going public, which could eventually saturate the market (like during the dot-com rush) and dampen investor optimism over the future prospects of these firms.

Time will tell if LinkedIn will become as successful as Google, which went public in 2004 at $85 per share and currently trades at almost $530 per share, and which now generates solid profits that analysts estimate will reach almost $34 per share for all of 2011. On the flip side, LinkedIn could eventually vanish, as did Pets.com and online grocery provider Webvan after the internet bubble burst in March 2000.

It will likely take a few years to determine if LinkedIn’s underlying operations have sustainable profit potential. The same goes for the other social media offerings that are on the way, and for now they are hoping that investors remain generous with their capital. (For related reading, see Investing In IPO ETFs.)

Disclosure: At the time of writing Ryan C. Fuhrmann did not own shares in any company mentioned in this article.


posted by INVESTOPEDIA