Tech Bubble? LinkedIn IPO Has Watchers Wondering

May 23, 2011 -- Ever since LinkedIn's IPO rocketed skyward, raining money on the company's founders and on early holders of the social networking stock, market watchers have been wondering: Are tech stocks poised for another leap to the moon? Are we seeing the re-birth of a '90s-style bubble?

LinkedIn's stock, issued at $45, went as high as $122.70 its first day, closing at $94.25. Day two saw another 14 percent rise before profit let out a little of the steam, and the stock declined by 1.2 percent. Based on Friday's closing price, the company's market value stands $8.8 billion--about 23 times revenue.

"By any normal valuation, that's awfully high," says Norm Conely, CEO of JA Glynn Investments in St. Louis.

So high as to be bubbalicious—in other words, divorced from reality? Josh Bernoff, senior vice president at Forrester Research, thinks yes: The stock's performance, he says, is "not in line with any flavor of reality I know."

The Wall Street Journal today reckoned that based on LinkedIn's 2010 profits and market value, if Exxon Mobil had the same valuation it would have a stock value of $19.8 trillion -- well north of the U.S. annual gross domestic product.

The business prospects for LinkedIn, Bernoff admits, are excellent. "There's a lot of potential for growth, both in terms of revenue and membership. When you need to connect with other professionals, LinkedIn is perfect. They dominate that space." But that space is limited. "It's not your whole life."

By contrast, he says, you really could spend your whole life on Facebook, whose potential he deems "limitless."

Problem is, you can't buy Facebook—at least not yet. The company has yet to go public. And therein lies the explanation for LinkedIn's performance, according to Bernoff: "LinkedIn has the advantage of being the first one out of the gate. Three social networking companies in the U.S. stand above the rest: Facebook, Twitter and LinkedIn. People wanting to get in on the excitement have been able to buy only one." On top of that, LinkedIn was relatively tight-fisted, he says, in how many shares it offered.

Kathy Smith, principal with Renaissance Capital, an IPO advisory firm, says the IPO's spectacular success was fueled by more than fundamentals.

"Some people are saying," she says, "that the underwriters mispriced it. But I don't agree. They thought they were pricing it with the fundamentals in mind. The social networking community priced it differently." The people in that community she calls enthusiasts—"not your typical investors." Some of them are too young to remember the tech bubble of the '90s or how badly buyers ultimately got singed.

In that spectacular run-up, Internet-based companies by the dozens went public with no profits, little revenue and lots of dreams about getting in the space first and attracting site visitors. The dotcom bubble of 1995-2000 saw the tech-heavy Nasdaq soar to 5,000 points then crash to less than 1,500 -- losing trillions of dollars for investors.

What we're witnessing now, Bernoff says, is not the birth of another bubble.

Bernoff believes the market will have calmed down by the time Facebook debuts. "If Facebook went public tomorrow, you'd see the same frenzy. Its potential is much greater than LinkedIn's. But I'm concerned than in the next few quarters LinkedIn's true potential will become clearer and cause some people to become disillusioned. They'll see it doesn't actually have a patent on fairy dust."