Unless you have been living under a bubble in the last week, the first of the major Social Networking companies went public. The initial valuation of LinkedIn (LNKD) was $32-$35 a share and one day prior to the launch, it was raised to $45 a share. Before the close of the bell on Thursday May 20th, LinkedIn hit a high of $122 a share. By the end of day one, the stock soared 109% closing at $94.25 which was 592 times earnings. This is from a company that in 2010 had a net profit of $15.4 Million and just over 100 Million users, up only 10% from 2007. .
How does a company that made $15.4 Million profit in 2010 have a market valuation of over $9 Billion (7.84 Million shares outstanding)?
A few key points you need to know about this IPO:
1. Initial research indicates that LinkedIn’s valuation team was make up of professionals who have never used the service.
2. There is a belief that LinkedIn subscribers tend to have more wealth than Facebook and Twitter giving more potential power to
the advertising dollar.
3. LinkedIn’s revenue doubled between 2009 and 2010.
4. The expectation is that Zynga, Inc, Facebook, Groupon Inc. and Twitter will petition for an IPO within the next 24 months
Now for easy credit, low interest bond issues. With the Federal Reserve expected to raise interest rates, there is a mad dash for investment-grade companies to issue bonds. Between Monday and Tuesday of last week $19 Billion was issued in the US and sales in May have reached $56.7 Billion almost surpassing all of April ($59.6 Billion). The most pronounced being Google, Inc, which is putting pressure on companies like Apple, Inc and Amazon to become more cash heavy.
What does all this mean?
With additional cash flow there are a number of ways this money can be utilized. It can be poured into research & development, product modification, or mergers & acquisition. There is a realistic probability that the growth of the Social Networking IPO and the high tech/online bond frenzy could result in a number of key acquisitions in the next twelve to twenty-four months, which could result in reduction of work force to cut costs and reduce duplication. As the largest industry giants begin to utilize the cash to swallow the competition and bring more niche services/components/technology on their own playing field, this could result in a negative effect on our war to reduce the national and global unemployment rate.
Before we focus on the small percentage of people that are getting very rich form this shift in corporate ownership, we need to take a very close look at the long term affects of how these activities will determine the bottom line on jobs in the United States and abroad. With such a massive amount of attention and currency exchange on the IPO burst and bond issues, it is easy to get swept away in the glamor without seeing the true economic impact it will have.
Let us hope the government, economists, wall street and corporate America are looking out for the well being of the common man and woman. Otherwise this boom could be a huge bust.