LinkedIn's IPO: How Did a Static Online Rolodex Raise $9 Billion?

LinkedIn went public at 50 times expected earnings based on its $400+ million in revenues. Is it really worth that $9 billion valuation? The short answer; probably not.

So why did otherwise savvy investors bid up what is generally conceded to be the least interesting of the social media behemoths waiting to cash in? Aren't these big fund managers and private equity guys supposed to smart, detail-oriented and cynical?

First, there was a lot of pent-up demand. There hasnt been a big tech IPO in years and a lot of people wanted to get this one into their portfolios. Second, and related to the first, fund managers are governed to some degree by 'asset allocation.' This means they need to put their clients' money in a variety of companies and sectors. This was the first tech company in a long time that promised decent growth prospects. Finally, given LinkedIn's rather unimpressive buzz factor, there are many who believe it will be acquired at an even more ridiculous multiple by some large, gasping - but cash-rich - Global 500 behemoth that thinks it can goose the company's growth to its own benefit.

Mathew Ingram comments in GigaOm:

"In one of the most eagerly-awaited stock issues in years — in part because the technology sector has been starved of initial public offerings — LinkedIn went public on Thursday and the shares immediately jumped by almost 100 percent from the offering price, giving the company a market value of more than $9-billion. The business-oriented social network is clearly a good business, with annual revenues in the neighborhood of $400 million. But is that really worth $9 billion, or are investors consumed by irrational exuberance?

Whether LinkedIn’s IPO is a sign of a new technology “bubble” or not — as some have argued it could be — there’s no question that some of what the stock has seen so far is pent-up demand as a result of the lack of technology stock offerings over the past few years. The last major tech issue was Google, and that was seven years ago, which is a lifetime in Internet terms. And companies such as Facebook, Zynga and Twitter have been racking up gigantic share valuations as high as $60 billion or more on secondary markets and through private investments by brokerage firms, in another sign of the demand for big tech players.

Unlike Facebook and Twitter, however, LinkedIn is a far more traditional kind of web service. Although it has tried to add social features — including many that have been copied from Twitter and Facebook, such as the ability to follow companies and see status updates — LinkedIn has not really become a social network in any kind of real sense. For the most part, the site still seems to be used primarily by people who either want to hire someone and are looking for candidates, or by people who are looking for work and are trying to connect with as many people as possible in their field.

When it comes to the social aspects of business connections, other companies have been focusing on those elements with much more success than LinkedIn — including Hashable, which is a little like what LinkedIn might look like if it was created today, for a mobile and real-time social world, as well as a Facebook-based service called Branch Out. And while LinkedIn recently launched a platform that is very similar to Facebook’s “open graph” platform, with social plugins for websites and the ability to login with your LinkedIn identity, it’s not clear whether most people want to connect their professional networks to the rest of their social activity on the web in that way.

At the moment, in other words, LinkedIn is still a kind of Web 2.0-style job board. That’s not to say job boards can’t be good businesses, and LinkedIn has shown that it is a good business, generating revenue of $243 million last year and even turning a profit to boot. That’s nothing to sneeze at, by any means. But is it worth a multiple of more than 50 times projected earnings for several years from now? That assumes an incredible pace of growth for the company over the next couple of years — and LinkedIn has said it isn’t likely to be profitable this year as it spends more on its infrastructure.

While Apple and Google have both boasted fairly sky-high multiples in their day, comparing LinkedIn to either one of them is not for the faint of heart. The growth that Apple and Google have been able to produce over the past several years is so anomalous compared to the vast majority of stocks and companies — even in the technology sector — that they might as well be from a different planet. And anyone who goes into this new tech IPO bubble (if there is one) expecting those kinds of returns from every company that goes public should be aware that they are on the fast train to heartache.