May 19, 2024

DealBook: LinkedIn’s Surge Sets Stage for More Internet I.P.O.’s

Reid Hoffman, LinkedIn's founder, on the floor of the New York Stock Exchange as his company made its trading debut.Mark Lennihan/Associated PressReid Hoffman, LinkedIn’s founder, on the floor of the New York Stock Exchange as his company made its trading debut.

It’s not 1999, but the big Internet I.P.O. is back.

Shares of LinkedIn, the professional social network, more than doubled on their first day of trading, a surprising debut that both echoed the giddy exuberance of the last tech boom and heralded the coming of several multibillion-dollar Internet companies, like Facebook, that are expected to go public in the next 12 months.

The initial public offering, the largest by a United States Internet company since Google’s offering in 2004, was a major test of investor demand for the new wave of fast-growing social Web companies. Valuations for start-ups like Groupon, Facebook, Twitter and Zynga have been surging in private secondary markets in recent months. Thursday’s market action was an indication that investors’ appetite for these businesses had not waned despite questions of whether sky-high valuations were justified.

Linkedin’s shares opened on the New York Stock Exchange at $83 — up from its I.P.O. price of $45 — and rose as high as $122.70 before paring their gains. The shares closed at $94.25, giving the company a market value of roughly $9 billion — more than four times the value of an early Internet king, AOL.

But this Internet boom is different in many ways from the last one.

The companies going public have more than just “eyeballs” of Web users; they have businesses that report earnings and revenue. LinkedIn, for example, which makes money from advertising, subscriptions and recruitment services, made $15.4 million last year on $243.1 million in revenue.

And unlike the late 1990s, there is no flood of new companies coming to market. Much of the enthusiasm for LinkedIn can be attributed to the small number of shares sold and a pent-up demand by investors who have had to wait out the financial crisis to put money in a sizable American Internet start-up. In its offering, LinkedIn sold 7.84 million shares, less than 10 percent of the company, with the option to sell an additional 1.1 million. Roughly 95 percent of the investors who wanted an allocation did not get their full allotment, said a person close to the offering who was not authorized to speak publicly about it.

“Today, there are a limited number of players in social media,” Lou Kerner, a Wedbush Securities analyst said. “There’s incredible investor demand for everything social because of its potential growth.”

Still, Thursday’s rally was particularly stunning because few expected LinkedIn to be a blockbuster I.P.O. The last United States company to gain more than 100 percent on its first day of trading was Nymex, the commodities market operator, in 2006, according to data from Renaissance Capital, an I.P.O. advisory firm.

Before this month, the company had attracted modest attention compared with its high-flying peers Facebook and Groupon, which have wowed investors with billion-dollar funding rounds and surging valuations.

In the first week of May, LinkedIn set the target range for its offering at $32 to $35 a share, which valued the company at about $3 billion. Then the company raised the bar 30 percent on Tuesday, to a range of $42 to $45 a share. The market rally on Thursday is now causing investors and entrepreneurs to scramble and adjust their calculations upward.

“If LinkedIn is worth $10 billion, you got to think, what is Facebook worth?” asked Peter Falvey, a managing director at Morgan Keegan.

“Not that long ago, LinkedIn was seen as the fifth major social Web company — behind everyone else.”

Facebook, which is widely expected to go public next year, has soared on the secondary markets, with shares trading at an implied valuation as high as $80 billion in recent months. The social buying site Groupon, which raised nearly $1 billion from investors in January, is said to be talking to bankers about an I.P.O. with a valuation of possibly more than $20 billion.

By far outpacing expectations on Thursday, LinkedIn is seen as positive harbinger for these businesses and smaller start-ups with I.P.O. aspirations.

Tony Zingale, the chief executive of Jive Software, a private company that provides social business software, said that he was tracking LinkedIn’s performance to gauge the markets.

“We’re excited,” he said, “It appears to be going well, there seems to be tremendous pent-up demand, for finally, a social media offering.”

Indeed, the euphoria around LinkedIn appeared to be spilling back into the secondary markets — exchanges where private shares are traded — bolstering demand for other start-ups. Second Market, one of the largest of such exchanges, said activity on its Web site and the number of sign-ups doubled on Thursday, compared with an average day.

Yet as more investors clamor for the shares of these popular social media companies, there is also a growing concern that valuations have become unhinged from fundamentals.

With a valuation of $9 billion, LinkedIn is now trading at 584 times last year’s earnings and 37 times last year’s revenue. The site, which has about 100 million members, offers a “freemium” business model: users can create free profiles or they can pay a subscription fee for a premium account with special features. LinkedIn also offers hiring solutions for businesses and recruiters. Although the company is still growing at a rapid clip, it is facing stiff competition from other online sites, like the job listing services Monster and CareerBuilder.

“The quality of their information is very good,” said Cem Ozkaynak, a co-founder of the financial research firm Trefis. But, he added, “LinkedIn will have to maintain the significant fees it charges to corporate and business customers while growing its corporate and business customer base significantly from a few thousand customers today to tens of thousands over the next few years.”

There’s also the concern that a strong valuation in the public markets — while nice for LinkedIn shareholders — could ultimately be an albatross for an eight-year-old company still struggling with profitability.

It was profitable last year, but it posted losses in 2008 and 2009. Now that its financial statements are being publicly disclosed, LinkedIn may come under pressure to meet the expectations of fickle shareholders who are looking for numbers that justify a $9 billion valuation.

That could be a significant challenge for LinkedIn, which has repeatedly expressed its commitment to investing in its platform, at the expense of short-term profits. A rich market capitalization may also make it harder for the company to retain and recruit talented engineers — a precious resource in a booming Silicon Valley.

“They will now have to make numbers, every 90 days, forever,” said Mr. Falvey of Morgan Keegan. “And, if you achieve huge one-day gains, existing employees will make so much money that they may not have to work again, meanwhile, you’ll have to prove to prospective employees that the stock is still attractive.”

LinkedIn’s executives, who were at the New York Stock Exchange to witness the opening of the stock, were exuberant over the market debut. Still, the chief executive, Jeff Weiner, sought to temper the significance of the gains.

“It’s an exciting day,” he said in an interview. “But we’re not focused on where the stock is. These short-term fluctuations are not going to be meaningful in the long term.”

The New York Times

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