In yesterday’s LinkedIn Bubble update I forecast ‘fireworks’ on the first day of trading. Well, we sure got some! Priced at $45, LinkedIn shares rose to $122 at one point – that’s a valuation of c$11b - before closing at $94. If I thought that LinkedIn was overpriced at $3b – I’m rather unsure of what words to use to describe a valuation of $9b!
Yesterday I made my way to the Channel 4 newsroom with Brent Hoberman. Some 15 minutes of discussion was recorded. In the event just one sentence was used. I blame Sir Fred Goodwin (again…)
So let me restate my main points:
1 – Likening the current situation to the dot.com bubble of the late 1990s is wide of the mark. Then ‘a rising tide lifts all ships’ applied. All tech stocks rose irrespective of whether they were anything to do with the internet. Remember Sage was considered THE UK internet stock (even though at the time they had absolutely nothing to do with the internet). Their shares rose to over £10 and a P/E of over 170 which a certain Holway described in the FT as ‘North of Stupid’. Eleven years later with consistent earnings increases every year since, Sage shares are at 290p.
Today most publicly quoted tech stocks are realistically priced – even the high flyers like ARM and Apple.
The current ‘bubble’ applies almost exclusively to unquoted social networking companies.
2 – In the dot.com bubble days, it was only the valuations which were over-hyped. Indeed, looking back, even our own estimates for internet take-up were actually on the low side. The actuality greatly exceeded the forecasts.
As regular readers know, I believe that social technologies will be THE disruptive technology of the next decade. We may be over-hyping the valuations again but we are NOT over-hyping the effects. Facebook is and will continue to be the most disruptive company in this space. But what Facebook is worth is quite another story.
3 – I have read many, many articles on ‘how to value a social networking company’. They are all rubbish. The only valuation metric which cuts the mustard is forward earnings multiples. The valuation of LinkedIn requires such a massive leap of faith in terms of earnings growth that a bet on the 3.30 at Newmarket looks a lot safer.
4 – Just like in the dot.com bubble, a small number of companies will make it. But for every one success there will be 99 or 999 failures. I believe the current bubble will turn out the same.
5 – One of the differences this time around is that the companies have had a longer record and have picked up more shareholders along the way. Unfortunately, what this really means is that the real gains for shareholders have already been made. Retail investors piling in at this late stage, and at these elevated valuations, will need a great deal of luck to see returns in the longer term.
6 – Finally, don’t make judgements on just one day’s trading. Remember that Renren had a massive rise on its IPO but is trading lower than its float price now.