What The Linked In IPO Can Tell Us About The Market

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Jim Trippon, CPA, is the editor-in-chief of China Stock Digest (http://www.chinastockdigest.com/), America's #1 performing China investment newsletter as ranked by Dow Jones - Hulbert Financial Digest. All of the stocks covered by China Stock Digest (http://www.chinastockdigest.com/) may be purchased by US investors in US based retail brokerage accounts. A professional investment manager, Trippon has worked extensively inside China, and maintains a permanent team of financial analysts in Hong Kong, Shanghai, and Beijing. He leads an annual China Investors Fieldtrip each October and his new book Becoming Your Own China Stock Guru (http://www.amazon.com/Becoming-Your-China-Stock-Guru/dp/047022312X/ref=si3_rdr_bb_product) was recently released by John Wiley & Sons.
In mid-May, professional networking site Linked In (NYSE: LNKD) went public at an initial pricing of $45 a share, but by the time of its trading debut on the New York Stock Exchange, shares opened at $83. Shares soared immediately during trading. By the end of the day on the market's close, Linked In traded at $94.25, with a valuation of $8.9 billion. It was by any measure an extraordinary performance.

While most traders and investors took note of this extraordinary IPO, most weren't directly involved in the scramble to pick up shares. Most of this action was unavailable to regular retail investors. So the IPO then became for most, water cooler conversation at the office, or with the lament of many investors, "Gee, I wish I'd been able to get my hands on some of those shares and flipped them." All the buzz generated by the high-flying debut of an internet IPO was noisy, but other than that, what does it have to do with most investors? Actually, plenty.

The larger context of Linked In shares taking off has implications for the markets and therefore for all us investors. IPOs along with mergers and acquisitions are often two important indicators regarding the activity level if not the health of the stock market. These are two of many indicators that most professional investors either follow or remain aware of, so as to get some sense of where the tides are currently flowing in the market.

IPO Activity Heats Up

If IPO activity were read by an infrared detector, it would reveal the US markets are starting to glow. This year the capital markets had seen by mid-May nearly 70 IPOs priced with a total of roughly125 filed. This is an increase of 20% in filings and nearly 40% in those priced, compared to last year. There are other anticipated IPOs besides Linked In that went off or are due this year. Russian search engine Yandex (Nasdaq: YNDX), along with China's social networking site RenRen (Nasdaq: RENN), are two of the better known companies that have gone public recently, while well known Dunkin' Donuts' (Nasdaq: DNKN) IPO is eagerly awaited by the market.

The chart below shows IPO filings, including those through May, 2011. Note that at this rate there would be 432 IPOs by the end of the year. Activity by May of this year has nearly equaled the total for 2009.

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A Pause For The Internet Boom

While investors most likely remember the storied IPOs of Google (Nasdaq: GOOG) in 2004 or perhaps better yet back as far as Netscape in 1995, Yahoo (Nasdaq: YHOO) in 1996, or Amazon.com (Nasdaq: AMZN) in 1997, when the internet boom was in full swing. By 2000, the tech-heavy Nasdaq, home to many of the new dot-coms, reached an all-time high on March 10 of 5,048.62.

Unfortunately, the internet boom became the internet bubble which burst in 2000 and 2001, when such names as Pets.com, Garden.com and Furniture.com failed in the cascade of internet stocks that went belly up. Remember Webvan? It was the concept of web-based home delivery of groceries, which never caught on. Many dot-coms had no earnings and scanty revenue. By September, 2001, the Nasdaq had been decimated and hit a low of 1,423.19, with many dot-coms in the digital trash can.

Here's a chart of the Nasdaq bear market beginning March 11, 2000 overlaid on the Dow of 1929.

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Linked In By The Numbers

So where does Linked In fit into this potential boom and bust picture? Obviously, it is part of the boom, but is there substance behind the company, or merely air? Is it, in other words, more of a Google or more like a Webvan? Linked In had earnings of $15.4 million last year on $243 million in revenue. The company's business generates sales from online ads as well as sales to recruiters, along with premium subscriptions. The company has stated business will slow and it does not forecast a profit this year as it invests in technology and expansion. The IPO was for only 7.84million shares, fewer than 10% of its total outstanding shares.

Boom Or Bust?

Many Wall Street observers point out that Linked In is richly valued if not overvalued already. It is also a precursor, a proxy, for the anticipated day when Facebook, Twitter and Groupon go public. Facebook's estimated valuation has risen to $70 billion on the private market. Clearly, we are getting into heady territory with the IPO market. The key to how it all plays out is how the overall stock market responds to future IPOs for the rest of 2011 and beyond. It will be one thing to welcome Facebook's IPO, another to welcome the inevitable imitators. Whatever questions investors might have about the projected value of Facebook will be writ large, or should be, for whatever wannabes follow.

But bubbles are built over time. The original internet bubble took several years to build. The problem for investors is if you are caught holding an inflated stock when the market realizes much of the value is non-existent, it's air that needs to be let out. This always happens suddenly, even violently, and the downdraft can be dramatic.

So far, things look at least partially restrained, even globally. It's not an internet stock, but in London the $11 billion IPO of mining company Glencore International closed unchanged, so investors are not yet indiscriminately hoisting every IPO to the sky. Yet.

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