Thursday, May 19, 2011

LinkedIn's IPO (Update)

Having blogged about Linkedln's IPO yesterday and predicted it to be a future bust, you may think I want to put my foot where I mouth (or fingers, I guess?) with the stock's performance today. For those who do not know, the share price (NYSE: LNKD) more than doubled today to $94.25 per share at the time of this blogging. That is a staggering growth rate for any company. However, I still hold true to my predictions. Linkedln will fail in the long term --contrary to what this author from PC Magazine says (why is he writing about financial news anyway?).

To elaborate on the reasons given yesterday, the fundamental explanation is that the market does not know how to price the stock of social networking sites. There simply is no historical precedent from which to compare this to -- not even the dot-com bubble of the late 1990s. And without any way to gauge prices, investors go crazy in their optimism. I believe all social network sites to be fantastically valuated when their IPOs are inevitably announced; this includes Facebook and even Groupon. If anything, we can all learn from the fates of MySpace and (just came to mind) Bebo. Both companies are what we might call "epic fails".

MySpace was arguably the first of the social networking websites. Its network was not as strong as Facebook's, but it was unique when it first appeared -- and people flocked to it. I still remember when all my friends from high school had myspace accounts (I even secretly signed up for stalk a girl I fancied back then). MySpace was launched in 2002 and then rapidly grew, expanded, all the way through past its acquisition by Rupert Murdoch's News Corp for $580 million in July 2005. At its height of popularity and usage, MySpace was valued at $12 billion in 2007. Today, News Corp is attempting to sell its 5-year old acquisition for reportedly $50 to $100 million. I can bet you that Murdoch wishes he had sold it back in 2007.

Similarly, Bebo was a social networking site created in 2005 as a rival to MySpace and Facebook. AOL purchased the company in 2008 for a staggering $850 million. But it would sell the company less than 2 years later for less than 2% of its cost, at $10 million. (If this is not epic fail, then I do not know what is.) Last year I interviewed with AOL for a position and vividly remember one interviewer shaking his head when I asked about the company's recent history. But judging by this Linkedln IPO, some lessons are not learned.

Look, Linkedln's future performance may prove me 100% wrong as it becomes a powerhouse of a social networking site. Its future value may justify its now insane $9 billion valuation. But these maybes are just what they are: maybes. Odds are more likely --especially upon reflecting on the failures of MySpace and Bebo-- that it will also fail. To me, the market has failed to valuate Linkedln properly and this will result in some very hurt shareholders in the future.

I will leave this post with a question and my own (biased) answer: what makes Linkedln so special to justify its $9 billion valuation? My answer is, it has pieces to justify a price tag but nowhere near $9 billion. Not even 1% of this current valuation. The first dose of reality is, when you compare Linkedln with Facebook*, you will find that Facebook is superior in every way and with the potential to steal Linkedln's market share. The second dose of reality is that Linkedln profiles are inherently not useful -- other than job seekers, there is no incentive for anyone to maintain a Linkedln profile. If you want to find out more about your new friend, Facebook provides much more useful (and more entertaining) information. All in all, the only way for Linkedln to be worth its valuation is that Facebook's future IPO is many times over its own. Not only is that scenario unlikely -- but also Linkedln better hope Zucks doesn't infringe on its territory.

*I like to compare Linkedln to Facebook in spite of being fully aware of their differences. After all, I have profiles in both sites. But I also see their inherent similarities, as is the case with every social networking website. Facebook and Linkedln depend on their ability to network one user to another -- only Linkedln has many less users than Facebook.

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