LinkedIn made $15 million dollars last year, and they just raised $660 million dollars out of the gate in this IPO. And, this IPO values LinkedIn at somewhere close to 6.5 billion dollars.
A valuation of 6.5 billion dollars on $15 million net income. Let that sink in.
... and remember guys, the stock price is just what the public is willing to pay for it, and is not directly bound by any fundamentals. It's not LinkedIn's fault that their stock is overvalued.
You may say it's not their fault, but if you log in to LinkedIn today you'll notice that all of the "news" articles - now placed in an even more prominent position than normal - are about how underpriced their stock is. Entirely coincidentally, I'm sure.
Think about the market price of houses before the crash, each buyer and the seller were willing to make transaction. We all know the result. Fundamentals are important as well as prospect of the company. So we should talk about what is that prospect that can make company's current market valuation rational.
True, though it may be that some participants are simply willing to buy the stock with the expectation that they can sell it quickly, for more than they bought it for.
7% of the total IPO issuance goes to the bankers. This number is consistent across the street. Once upon a time, anti-collusion investigations were threatened because there was no explanation for why every major bank charges exactly 7%
I've often thought that there is no need for collusion if you can exchange minimal information over public, legal channels and know how to work a strategy that assumes a modified prisoners dilemma. You can often see oil prices or airline tickets operating that way. E.g when one airline raises prices, then sees that no-one is following the rise, after which the price comes back down. Or everyone else is ready to raise prices and ticket prices go up.
Yup; if judges presiding over anti-trust suits had read Thomas Schelling's book The Strategy of Conflict, there would be many more broken-up oligopolies than there are now.
This forbes blog suggests an auction would have been fairer, and I strongly agree. Institutional investors who got in on the IPO are just printing money, whereas a google-style auction would have given more of that money to the owners.
Not necessarily, since the $45 price was at the top of the range and the issue had already been repriced. We won't know whether the $45 price was optimal or not for a while -- it may seem expensive in 90 days when the price settles down.
But if the public is buying the stock at the $80 range minutes after it opens, isn't that enough to say that the initial offer was lower than what it could be? I don't think you need to know what price the stock is trading at three months from now in order to judge the initial sale value.
That really doesn't make any sense. As anyone who knows the stock market will tell you, if you can guess the price of a stock before the market opens, you'd be a wealthy man. But underwriters are conservative with initial IPO pricings because 1) they have no real idea where a stock will go once it's public and 2) they want the stock to go up after it opens (IPOs that don't do this are said to be "broken" and sometimes never recover).
If LinkedIn wants to capture some of the value from the multiple they're seeing today, they can simply sell (or issue) more stock. Doubling or tripling your IPO price is not a tragedy by anyone's standards.
Those are good points, and I'm not arguing that they left a lot of money on the table or didn't, but what I am disputing is where you said "We won't know whether the $45 price was optimal or not for a while --it may seem expensive in 90 days when the price settles down."
Why does the price 90 days from now matter to the judgement of whether or not the initial sale - today's sale only - was a success? If the price drops below the initial sale value, then $45 today will definitely seem expensive to people buying it 90 days from now. But I don't see where it would mean that the company made a mistake in the initial offer of $45/share - in fact, wouldn't it look like the company got a good deal, in selling the initial shares at above-market-values (in 90 days from now)?
The reason is because (in the absence of clairvoyance) the performance of stocks is evaluated over time. If the price is closer to $45 in a month or two, it'll be easier to say that today's price jump was an aberration. If the price is $180 in three months, it'll be possible to say that today's price is actually too low.
But we aren't discussing the long-term performance of the stock here - we are discussing the wide range between what their initial offer is, and the amount the IPO underwriters got to take home.
Forget all the junk you think you know about markets. A stock is something you buy. How many things have you bought that doubled in resale price the day you bought it? I'll bet it's a vanishingly small number.
From a producers point of view such a situation means you underestimated demand for your product, which means you didn't do enough research.
In line with the common stupidity of IPOs, LinkedIn trusted a conflicted party to do that research for it.
LinkedIn paid a fear tax. Fear that if they tried to buck the statu-quo like Google they wouldn't come out as well, fear that if they tried something shockingly new like selling stocks directly to individuals who want them they would fail.*
I don't mind when people note the standard way things are done, but for the love of Bob don't pretend the way the stock market works today is fundamental, immutable, or even close to Good.
* Speed argument on this point: Illegal! -> Benefits from that? -> Ignorant investors protected! -> Uh huh, other externalities? -> Large investors make millions! -> We're done here.
Good point, although the original point still stands: $352.8 million on last year's $15 million. Of course, stock price is a prediction of the future, not necessarily a comment on the past.
expense growth is 46%, 82% yoy.
revenue growth is 52%, 103% yoy.
So, you have a company that is growing revenue faster than expenses, has 100% year over year revenue growth, and has just hit the inflection point to be profitable... and you want to place a market average P/E on it?
And just to be clear, an incredibly easy ballpark valuation would be to just take the midpoints of the rev / cost growth and go 3 years out... which gives $1.3B revenue on $1.1B costs = $200M profit. A slightly high market multiple on that (18) would still be only $3.6B. And there will be dilution, selling pressure from insiders whose lockup periods will be ending, lumpiness in the numbers... I certainly would not buy LNKD valued at $8B.
But... I will say that I would be encouraged if I were a shareholder by this:
'The company' chief executive officer, Jeffrey Weiner, said in an interview that he wasn't placing much importance on how his company's stock performed on its first day. Mr. Weiner's stake in the company is now worth more than $200 million.
"To be honest with you, I didn't give a lot of thought to what the opening would be like," Mr. Weiner said. "This isn't necessarily indicative of anything. The market will do what it will do. What we are completely focused on is our long-term plans and our fundamentals, and getting that right."'
If LinkedIn can make $243M/year selling to recruiters and job seekers in a recession, what do you think happens when we have a global recovery and the inevitable hiring boom comes?
People are going to be 'networking' most intensely when they don't have a job or are worried about their current job. If there are fewer people looking for a job and those people get pulled out of the market more quickly, there's less money to be made from them.
LinkedIn is not likely to make money out of job seekers. Their fastest growing income stream is LinkedIn Corporation Solutions. I'd assume that headhunting is harder during good times, thus I think they are more cyclical than counter-cyclical.
I'll tell you what happens. Recruiters and third parties sign up in droves for the sole purpose to spam the userbase, which ultimately drives members away from the site.
LinkedIn earned their 100 million users by providing a professional networking platform where the users could choose who they network with. When the userbase has less of a choice regarding who contacts them, they'll abandon linkedIn as fast as a teenager terminating his MySpace account.
PE ratios are for yield businesses that have been around for decades and with nowhere much to go
With LNKD you should be looking at revenue, competition and market penetration (rev is doubling yoy, three sources, 4500 business customers paying avg. $23k a year, 75% of fortune 100, 60% USA - which means they have a lot of growing to do). they are spending everything that comes in on product development, sales and marketing and R&D - it is all growth phase. $400M revenue this year.
To add - LinkedIn isn't really a 'social' company either since its revenue is not based on ads. They are in the recruitment market, where companies are known to pay tens of thousands of dollars for recruitment leads. And in that regard, they still aren't even exploiting their position as much as they could be (which means they have a lot of room to grow both out and up)
If they wanted to impress skeptics they could cut back all sales and marketing and development and just bank the 450M and pay out a dividend, in which case it would be a market cap of ~$4B, and a lot more love in comment threads on the internet :)
FWIW, they had 250M revenue last year. 15M in earnings might indicate they are aggressively investing in growth. So if you're going to look at that critically, investigate where the other $235M is being spent.
As long as people are going short, banks have incentive to keep the price high and rake in the interest, using it to keep inflating the price. Only when everyone has stopped believing the price will go down and stops short selling, then the banks can no longer inflate the price and will let it go down. See oil for an example.
During the first 30 days after an IPO, the underwriters are not allowed to lend shares for short sale. Additionally, number of shares are limited. The entire float is not available on the first day of trading. So today, it is probably impossible to short. 30 days from now, it should be available to short.
I've heard that larger banks and brokerages (not the underwriters) will start making shares available for shorting as early as Tuesday, which should help ease the share price down.
Not always. There are some companies that don't have enough liquidity to effectively make that trade or have no investors willing to lend the shares. Not to mention shorting (or options) aren't even allowed yet on this particular stock.
LinkedIn is not even trying to make net income so it's erroneous to perform much analysis on that number. Yes, it's a lofty number but LinkedIn has been around for quite some time and has very solid and very rapidly growing financials.
Yeah but they sank all their money into tripling the number of employees at the company and investing in R&D. That's exactly what you want to see if you expect large growth.
LinkedIn is clearly focused on long term gains over short term profits.
"Let's start by defining 'investing.' The definition is simple but often forgotten: Investing is laying out money now to get more money back in the future — more money in real terms, after taking inflation into account." [1]
-Warren Buffett
"Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return — even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with a fine result." [2]
Those are really important and good points...but they're also why the two amigos don't invest in tech
- hard to predict if LinkedIn will be around and in what form in 20 or 30 years
- Munger's statement is true if the company can keep reinvesting capital at that ROE over a long time period. In fact, beyond an inflection point, a company like Microsoft or LinkedIn can become a natural monopoly and increase revenues and profits a lot with relatively little capital - there are actually INCREASING returns to scale. Which is what LNKD investors are apparently betting on.
Tech investing is more about the Next Big Thing, who is the next Microsoft or Google, and less about is there some moat that lets them earn 18% on capital and keep reinvesting the capital over a long period, which is where Buffett is a master.
I thought this might be interesting, John Cassisy at the New Yorker claims:
"One more cautionary note: Don’t take too seriously the headlines you will see about the market valuing LinkedIn at $8-9 billion. Using the oldest I.P.O. trick in the book, the underwriters only issued 7.84 million shares, thereby creating an artificial shortage. Even at $90 each, the value of LinkedIn’s publicly issued stock is just $706 million. The $8-9 billion figure comes from taking the market price and applying it to the rest of the company’s common shares, more than eighty million of them which haven’t been issued yet. It may well be several years before all of these shares are trading on the open market. At that point, we will have a better idea of what LinkedIn is really worth."
Really the only people making any money here are the underwriter and venture capitalists who took this company public - the guys who pumped up and are now dumping these shares. While they're high fiving eachother with a job well done it's setting up the exact same crash that happened last time.
That would prevent insiders and common shareholders from selling their shares, but it would in no way prevent an investment bank from unloading their shares through some sort of intermediary.
Morgan Stanley & Co. Incorporated may, in its sole discretion, release all or some portion of the shares subject to lock-up agreements prior to expiration of the lock-up period.
They probably are, but what I mean is they could use some 3rd party to short their own shares. We're talking about people that can rob the US government of a trillion dollars in plain sight.
Through an under the table deal with any hedge fund, or any number of other means, an investment bank that owns LinkedIn shares could quite easily insure their profits. That is exactly what these businesses do.
Read "The Wolf on Wallstreet." Don't know if it's still happening that way, but the author made it sound like "pump and dump" was (is?) a pretty common game.
Having read the book you mentioned, the chop shop practices of that era have largely been killed off. I'd give more citations if I wasn't responding from my droid,
Suppose there is a tech/social web bubble, is there anything anyone would advise for starting your own startups? E.g:
stick with the day job;
bootstrap rather than take money;
postpone and launch in 2 years;
get in fast while the hype is still there?
Any startup survivors from the last one wish they'd done things differently?
It's mainly the investors that lose out from a bubble bursting--one way to look at it is that a bubble is just a good time to get a high valuation from a company's perspective. By calling it a bubble, you're saying you think there's more money out there looking for startups to invest in than startups whose prospects can support that valuation. That's a good time to get OPM (other people's money) and spend it on whatever your dream idea is, if you think you've got a shot at making it work.
There are of course counterarguments:
- Other startups are getting too much money at the same time you are, and probably spending it in irrational ways that may make it harder for you to be profitable, such as overpaying on advertising and hiring. The same argument can support the idea that the best time to start a startup is during a recession, when the big companies aren't investing enough money in growth.
- When the bubble bursts, there will be far more startups looking for money than money looking to be invested, so you're more likely to have to throw in the towel after bursting.
On the balance, I agree with the advice of most experienced entrepreneurs I've heard--err on the side of worrying more about yourself, your idea, and how you'll execute, and less about the economic environment at the time.
LinkedIn listed 7.8M shares. So far today, and we are only half way through the day, there have been 29.5M transactions - which means each LNKD stock has been bought or sold on average 4 times
Latest NPR Planet Money podcast episode was about bubbles, they interviewed a university professor that was running experiments on his students. They had a fake stock market with only one stock on it that would have a random dividend of either $0 or $2, so $1 on average. Students were given money to invest in the stock market. Running this experiment apparently over multiple courses, even in this small market there would be bubbles.
He brought up one such bubble in a lecture in front of the students, explaining to them that their investment made no sense considering the average dividend. He expected this explanation to crush the bubble since now everyone was aware of it. What happened instead was students going "wow, a bubble, I must get in on it!" and the stock just going even higher.
People don't treat monopoly money like real money. Stunning. Next the professor should see how risk adverse these students are with their own tuition dollars. Suddenly these kids aren't the big rollers they were with imaginary risk. Quit looking at numbers, follow the risk. Numbers are relative to risk. Consider the influence of monetary policy on risk. Does a cheaper dollar make a frugal investor? Hardly.
Especially for college students... Which is why they are so heavily marketed to by credit card companies (not to mention the entire high tuition/student loan situation).
The IPO should have probably been priced a little higher. Closer to $70 or $80, given this type of demand. The people that were in on the IPO got a very nice return this morning, provided the stock price stays this high for a little while. Also, LinkedIn would have raised something closer to $700 million or more, had the IPO been priced more accurately. Does anyone know who the underwriters were?
People should educate everyone on why we have a bubble with arguments instead of shouting "bubble! bubble!", every time people discuss the finances of start-ups.
I'm not shouting 'bubble'. 1995 was not a bubble. Even given their record-breaking IPO pop, Netscape may have been underhyped at that time – given all that was to come, and despite how things ultimately turned out for 'Mosaic Communications Corporation'.
So one potential lesson from parallels to the NSCP 1995 IPO is that there may be 4-5 exciting years ahead.
Sure, and IPO is essentially a sale of an unpriced piece of equity. Nobody knows really how much its worth but as with earlier funding rounds various techniques try to estimate the value going out the door. That value is the combination of "price per share" * "total outstanding shares" so the total value of the company.
The company registers to sell a certain number of shares, this is additive to the total number outstanding, so once you have what will be the new total, and what you think will be the value of the company, you divide value by total and that is your price per share.
Then you go out on a 'road show' where you talk to various other banks and other investors and you say "We think the company is worth between X0$ and X1$ for these reasons and that is a share price of between $Y0 and $Y1, would you be interested in buying shares?" and they may say "Not really." or "Sure we'd love to by n shares at $Y0 and maybe n1 (often less than n) shares if it was at the high end of $Y1"
Now at some point on this road show, if you're good and the company's prospects look great, you have people who have signed up to buy all your shares, even if it comes out at the higher price. That has validated your price point, now if you haven't even talked to half your prospects you might decide to raise the offering price or increase the number of shares, you go back and call the folks who committed before and make sure they are still on board.
Now you have a list of people who are willing to buy your stock, and then when the market opens you sell them that stock at the high end price, and collect your money.
Now those people (and the bank that is the 'market maker') for the stock may be willing to sell the stock for a premium over what they paid for it. Other investors who have read the S-1 but weren't part of the initial roadshow might say "I'd buy this stock even if it was 20% higher than that initial price." and they put in a buy order for it, someone says "Hey a quick 20%! I'm down!" and sells them the stock they bought at the IPO price from LNKD.
The price bounces around and then lands at a point where nobody else is willing to buy it for any more money than it is being offered at. Nominally the 'market' price for that company.
Now if people start buying the stock for any price because they just "want in on the action." as it were, then the price can rise above the price that is supported by the fundamentals of the company, and that is a speculative price rather than a market price. Stocks priced on speculation define a bubble.
So LNKD priced at $45 I think, they had more demand than they could meet, and the price has risen. Are speculators buying it? Hard to know yet but it seems like there is some speculation going on.
When a new issue is offered to the market, after it is priced but before it actually starts trading, all of the buyer and seller interest is consolidated to determine what price point would result in there being an equal amount of buying and selling. And that becomes the opening price.
The chart at google finance displays the price was $83 on 9:30 when the volume was 0. I can understand the price rising due to higher demand but not the discrepancy in google finance chart when the volume was 0.
that's where it opened. the $45 price is where stock was bought before it started trading publicly; once the stock opened on the nyse it first changed hands at $83.
LinkedIn’s IPO is viewed by many as a barometer of the public market’s appetite for Internet and social media companies, with the likes of Facebook, Groupon, Pandora and Kayak expected to IPO within the next year. Certainly, today’s huge pop in LinkedIn shares sends a signal that the market is once again hungry (if not starving) for tech.
Main Street investors clamored for the job networking site's stock, which had only been available to the country's biggest mutual funds, pension funds and other major institutional investors in Wednesday's IPO.
This was from a story on Yahoo finance today. Seems Main Street investors weren't welcome yesterday. Their demand for shares today could well be driving the price. I like LinkedIn, but this feels unduly speculative.
You couldn't have actually put a lot of money on it (unless you bet one of your friends, or in the unlikely case that you or your family member works for LinkedIn). The trick with IPOs is that even if you had the shares earlier, you couldn't sell them today because of the six month lockup period. The only way for you to get in would be right now at ~$80.
that is true if you want to directly purchase shares, but there were market makers and other outlets offering CFD's and derivatives at just above the list price.
judging by the volume (9M traded so far, which is more than what was listed) there seems to be a lot of that going on
The CEO commented that he was "happy" with the IPO price. Given that CEO's generally are not happy with leaving 100% on the table, I would surmise he knows it's overvalued.
You're correct, according to Henry Blodget at Silicon Alley Insider. The CEO sold some stock last night at $45, which could have been sold for $90 this morning. http://www.businessinsider.com/linked-in-ipo-2011-5-b
Is he supposed to publicly comment that he's "disappointed" with the IPO price? I think the Youko CEO did something like that, and just embarrassed himself for being naive...
I was going to type a fairly lengthy comment, but I think I'll just do a one sentence sum-up (and hope I don't get downvoted for it!): This is yet another strong piece of evidence that we're in a bubble.
At times like this I'm tempted to short the stock, or at least wait a month or longer until there's sufficient shares to short and not immediately get squeezed. It's just that unlimited downside, investor euphoria on social networking, and volatility makes me too nervous to do it.
I probably should and wonder whether the price of put options gets inflated due to all the people who want to short? I could also put stop limits but the volatility makes that worse than options.
Why? What does that have to do with anything? So lets assume I enter into linked in the fact that I have a 100 professional people who won't spit on my name, my employment history and some recommendation blurbs. How much is that worth to a hiring manager screening employees? Out of 20 candidates for a job its not worth much, but if they want to extend an offer its worth something. Also assume job switching every 2 years. So every couple of years some sucker would be willing to pay for that information. The thing I find funny is that the upgraded accounts that linked in flogs are violating your privacy for extra money. Can I check a "Not linked in's bitch" check mark?
I don't think it is a matter of if, rather "when". Recruiters I know much prefer to find candidates on LI vs Monster and other services and I have a feeling this is only going to broaden and the appeal will continue to rise as future offerings and updates to employers likely roll out.
And, agreed that a price tag of $100 a head, if you will, is cheap in terms of value for marketing and recruiting/employment services.
On a side note, how I let this fall from my radar to get in on the rush at the bell and sell by lunch is beyond me. I hope others here weren't so lazy and picked up some cash.
4500 corporate customers, including 75% of the Fortune 100, are currently paying LinkedIn an average of $24k for recruitment services (ie. access to profiles for headhunting)
That is one of three revenue streams. All three have been growing 100% YoY, and ~60% of it is USA (ie. they haven't grown out internationally yet)
Not hard to imagine. 700M users at a $70B valuation = $100 per user. I guess that's why how the current valuation of LinkedIn comes about. And if you use this metric, and believes that LinkedIn's growth potential is significantly stronger than Facebook, you could even argue that LNKD is still way undervalued.
BTW I made a Tagxedo (word cloud) of this morning's LinkedIn News, and one prominently featured word explains all (the word starts with "F" and ends with "k" :D)
This is nothing more than a legalized pyramid scheme.
The valuation of LinkedIn has nothing whatsoever to do with the business, its performance, future potential or current assets.
It has everything to do with demand for its stock being high.
At some point, the fad will die and a whole host of small time investors will lose their shirts (or houses, life savings, retirement funds, what have you).
Like all pyramids, if you can get in now you probably will make some money, but don't ever fool yourself into thinking this has bearing whatsoever on anything but your position in the pyramid. This will come crashing down. LinkedIn is NOT a $4 Billion company. It's just a matter of when.
News flash: every company's stock value is based on demand for its stock. This is how the price for everything is set.
Maybe when we discover true stock-picking clairvoyance this will change and every stock's price will be based on its true future potential, but I wouldn't hold my breath waiting for this to happen anytime soon.
The demand however is based on "expert analysis" that suggests that LinkedIn is worth 4 billion dollars.
I don't have an issue with demand setting the price; I have an issue with that demand being justified by linking it back to the potential performance of the company in such a way that anyone with half a brain can seen is bordering on the ludicrous.
If the problem was limited to investors that were prepared to take risks and pay for their own loses that would be one thing. The issue I have is that when these things do come crashing down, it seems to hurt everyone but wall street.
It's also unsustainable. LinkedIn will never be worth however many billions of dollars it's valued at right now without a healthy does of speculation and fad-type demand.
They only made $15 MM last year. That's a perfectly acceptable profit and a well run company, but it is not billions of dollars.
If you're looking for a scandal, how about the apparent gross underpricing of the stock by linkedin's investment bank? Isn't the reason companies hire these "experts" is that they have a good idea what price people will pay for your stock? Missing by over 50% is pretty bad.
EDIT: On the flip side, you can't blame the banks if the institutional investors are simply overpaying.
Every IPO underwriter has to make an educated guess as to the opening price of the stock. Again, the "apparent gross underpricing" won't really be apparent for months, and it certainly wasn't apparent at the time the IPO was priced, since we can assume that their underwriter does not possess True Financial Clairvoyance(tm).
A valuation of 6.5 billion dollars on $15 million net income. Let that sink in.