The LinkedIn (LNKD) IPO has made a ton of money for early investors with the social media company seeing its price more than double in a few days. A lot of investors will be tempted to buy shares because of the price momentum. This would be a mistake. Early investors have made their money which means leaves one investor that will likely buy shares now and is always late to the table.
That is the retail investor.
Retail investors are always late to the party because fund managers typically acquire shares of a company once it has already made its move. Most fund managers are like sheep with one following another. If one fund manager decides that a company like Linked In is a good stock to own then another will likely buy shares as well. Retail investors always seem to get stuck buying on the high end and selling at a much lower valuation.
The IPO was supposed to have a price in the low $30′s and a valuation of about $2.5 billion. The stock opened in the mid $40′s instead and today trades at almost $100 a share. LinkedIn has market cap of $9 billion dollars in its first week of trading. That is much too high for a company that only had revenue of $200 million dollars last year!
I am not the only person that thinks that LinkedIn does not deserve this valuation.
The Motley Fool had a great post recently about the extreme valuation of LinkedIn. The Motley Fool does a great comparison of Linked In with an industry competitor that demonstrates just how overvalued the company’s shares are. I think that LinkedIn is benefiting from the excitement that investors have about social media companies. Social media companies are the new flavor of the day for growth investors.
In the 90′s Internet startups were incredibly popular and were trading at insane valuations. Lots of companies sported triple digit stock prices and had insane multiples based on their core earnings. The same thing is taking place today. Investors are going to bid up social media companies and most of them will not be great investment ideas. The problem with social media companies is the lack of an economic moat. There is not much loyalty when it comes to social networks. Except for Facebook and maybe Twitter, the other companies could easily lose market share to a hungry competitor.
Before LinkedIn, Monster.com was the king of the recruitment business a decade ago. LinkedIn has differentiated itself somewhat from competitors with its applications but the company does not deserve its hefty price tag. At $30 to $40 a share, LinkedIn is a solid buy. At close to $100 a share, LinkedIn is a poor investment.