By Matthew Kloster
In May 2011, the IPO market came back to life and produced the most U.S. IPOs since 2007. Many companies have been waiting out the past three recession laden years to raise capital in order to make their offerings as profitable as possible. May saw several breakout IPOs that put confidence back in the IPO market and will be a catalyst for seeing more companies have IPO in the remainder of 2011. High-tech companies took over 57% of the capital raised in May IPOs and have started a large high-tech IPO trend with companies such as Fusion-io (FIO) in June and Pandora, Groupon (GRPN), and Zynga all planning IPOs in the near future.
The two main culprits in the May IPO boom are the professional-minded social networking site LinkedIn (LNKD) and Russian search engine Yandex (YNDX). LinkedIn’s IPO price was set at $45/share and rose over 109% in the first day of trading while Yandex’s price rose 55% in the first day and raised over $1.3 billion which made it the largest IPO since Google (GOOG) in 2004. These companies both saw a large pop in the initial trading days and it remains to be seen if they can hold their high prices in the long run.
LinkedIn is a business-related social networking site that has over 100 million users making it the largest site of its kind in the world. Users create profiles and "connections" with people they have met. The goal the average user is to have an easy and professional way to utilize networking for future employment and hiring purposes. LinkedIn differentiates itself from most other social networking sites, such as Facebook, by having a professional profile fit for current and future employers to view showing strengths and valuable career skills gained throughout one’s experiences. Facebook has become, for most people, a tool for enjoyment and has a fun feel which makes many people nervous about connecting and networking with business professionals due to the content on their profiles. This makes LinkedIn a must-have even for people already very connected in the social-networking world. In utter simplicity, LinkedIn is your suit and other sites such as Facebook are your everyday clothes in the world of social networking.
LinkedIn is currently adding a user every second to their current base of over 100 million users. They are getting great publicity from all of the talk of the recent IPO which is only fueling more users to join who may have never considered LinkedIn as a valuable asset, myself being one of them. This fast user adoption pace is incredible, but will for obvious reasons eventually slow down. They currently have two large competitors, Viadeo and XING, who boast 35 and 10 million user respectively. These competitors are far behind LinkedIn in users, and neither has grabbed a large portion of users from the United States as they have primarily been adopted in Europe and Asia. Viadeo recently opened an office in San Francisco and plans to work on gaining success in the U.S., but will not be a threat in the near future especially since most people in the U.S. use LinkedIn and do not want two networking sites that complete the same objective.
LinkedIn’s IPO price was greatly undervalued and may bring back memories of undervalued IPOs of the late 90s. The underwriters did their investors a great favor and allowed them to double their money on the first day of trading. This caused LinkedIn to miss out on almost $150 million they could have gained if the price had been set correctly. IPOs should typically be priced 10-15% under the actual value to give large investors a reason to buy stock in the company at the beginning, since the company has not proven itself in the market. By the way LinkedIn is trading today, the underwriters should have priced LinkedIn somewhere around $60/share; a whole $15 more than they actually did.
LinkedIn is currently trading around $72.83/share with a market cap of $6.88 billion. Two statistics that are huge red flares are their P/E which is over 2,000 and EPS which sits at a a low 0.04. These are not promising signs and imply the stock is definitely overvalued which has caught the eye of short-sellers who will keep the volatility of this stock very high over the next few months. Investors will continue to buy and sell in large quantities while the stock drops and rises in the short term before eventually settling down below the current price. It seems the stock is definitely over valued as even if they paid out all of their earnings the return would be less than to 10 cents. The company will continue to gain large amounts of users over the next year and implement small additions to their offerings, such as allowing users to scan business cards with their phones and add them to their contacts, but nothing large enough to create a large increase in stock price. The actual value of the company should grow, but the price will not be indicative of this since it is trading above the actual value. There is no evidence to support an increase in the price considering what it is trading at today.
What should you do?
They garnered large amounts of attention with their IPO, but the excitement will soon slow and the price will fall by 10-20%. As an individual investor, this is not a stock to pick up right now due to the overvalued price and the oncoming volatility due to this overvaluation. If the stock holds its price over the coming months, it may be suitable to buy, but that is very unlikely and investors should wait and let the excitement die down which in turn should have the stock price be much closer to the actual value. After this volatility recedes and the price drops, it will be a better investment as the company appears to be heading in the right direction and will continue its success as the undisputed leader in the social networking niche devoted to professional connections. With this being said, new IPOs, such as Groupon or Facebook when it eventually IPOs, may be an even better investment depending on their initial prices and trading values over the first few days.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.