Ten years after the last internet bubble burst, “valuations for digital businesses are again rocketing skyward”, says Steven Rattner in the FT. Last week LinkedIn – FaceBook for businesspeople – floated at $45 a share, jumped to $124 on its first day, and finished the week at $94. That gave the company a market value of $9bn, or 36 times last year’s revenues and 600 times its net income.
Renren, China’s Facebook, peaked at 100 times sales after its recent debut. Microsoft’s recent purchase of Skype valued the internet telephony group at a punchy ten-times sales. Facebook is not listed, but in the unofficial private market that has developed to allow early investors to cash out, shares have been changing hands at around 30-times sales. “A trend towards irrational exuberance is emerging,” says Fidelity’s Tom Stevenson in The Sunday Telegraph.
On the plus side, continues Stevenson, LinkedIn “is a real company with real sales and profits”, unlike the “unproven, blue-sky businesses” of 1999. But even the revenue assumptions that would justify the flotation price “are heroic”. Investors should also note that Friends Reunited looked highly promising when ITV “foolishly” bought it. Facebook’s rivals Bebo and MySpace also disappointed. Social networking is a “high-risk area”. The difficult economic backdrop will affect LinkedIn’s core advertising and subscriptions streams – the initial “frenzy” is hard to justify, adds professor Venkat Venkatraman of Boston University.
Still, it’s not quite 1999 all over again – not yet, at least. Instead of a broad-based rush for anything vaguely related to technology, this appears to be largely a craze for social networking companies. “Investors are buying LinkedIn because they cannot get into Facebook… people are just really desperate to get into social media,” one wealth manager told the FT. According to Youssef Squali of Jefferies, 80% of internet firms on the public market “are trading at reasonable levels”.
More internet firms, some of which have already achieved eye-popping valuations in the private market, are currently waiting in the wings. So the strong debut of LinkedIn could prompt a spate of flotations leading up to Facebook going public. If the euphoria surrounding LinkedIn’s float “turns into a habit”, says Richard Waters in the FT, “the ‘bubble’ claim will become hard to refute”.