LinkedIn IPO: Media’s Crazy Comparisons; It's Not the 1990s All Over Again
After its stunning market debut Thursday, there’s no doubt that LinkedIn is a bubble. But contrary to the crazy comparisons being made in the press, it doesn’t signal a repeat of the 1990s dot-com bubble, argues Gary Rivlin.
When Netscape made its stock market debut in August 1995, its share price spiked 109 percent, blowing the first large breath into the dot-com bubble. On Thursday, the social networking company LinkedIn had an eerily similar first day as a publicly-traded company as its shares rose rise by 108 percent.
Is it any wonder the world was ready to declare Silicon Valley in the midst of another Internet bubble? Especially when the stock market instantly gave LinkedIn, a solid but second-tier Valley success story, a value greater than Southwest Airlines, U.S. Steel, Hertz, Delta Airlines and Tyson Foods?
But those quick to declare a bubble strike me as akin to the shell-shocked war veteran who flinches each time he hears a loud noise. Sure, a share in LinkedIn is preposterously expensive. Associated Press technology writer Michael Liedtke, who drew the Netscape comparison, points out that the average tech company in the Standard & Poor’s 500 index has a price-to-earnings ratio of 15. By comparison, LinkedIn finished its first day on the stock market with a P/E ratio of 554.
“There was an unmistakable echo of the dot-com boom Thursday on Wall Street,” Liedtke began his LinkedIn dispatch. That was the kind of line one read a lot over the past 24 hours, running under the byline of any number of tech and financial writers.
Except that, where the late 1990s saw hundreds of Internet startups going public, most of them half-baked concoctions brought to market before they had earned a dime, LinkedIn is an eight-year-old company with 1,300 employees that booked nearly a quarter of a billion dollars in revenue last year.
That’s not to discount the significance of LinkedIn’s stock market debut, which ranks as the biggest since Google in 2004. Whether we find ourselves in another tech bubble is a question that has been popping up on and off for years now. The first time I remembering hearing it was 2005, when a venture capital firm’s investment in Facebook gave this as-of-yet-ubiquitous social networking company a valuation of $100 million. The question came up again earlier this year when Goldman Sachs appraised Facebook as worth $50 billion for any Goldman client desiring private shares in a pre-IPO Facebook.
My attitude: who cares if a bunch of elites with deep reservoirs of money and the right connections prove willing to pay lofty prices to own a piece of the future? What made the dot-com bubble so profound and traumatic an event wasn’t that venture capitalists and favored clients at a big investment bank took a big financial hit. It was the collateral damage it caused to the wider economy and to people's 401(k)s.
LinkedIn is a single company. And as crazy as its stock market debut was this week, it still doesn’t come close to matching the laughing-gas nuttiness that marked the second half of the 1990s.
“We always have lots of little bubbles in Silicon Valley,” says Valley wise man Paul Saffo. “The problem with the bubble in the late 1990s is that everyone’s grandmother got involved, and that was bad because it made the bubble too big, and it made the price of failure too high.”
Now that LinkedIn is selling shares to the general public, anyone with a little extra cash laying around can get involved. And already we see that the LinkedIn IPO was good news for the wealthy and the well-connected and bad news for pretty much everyone else wanting a piece of the action.
The insiders—favored clients of Morgan Stanley, JPMorgan Chase, Bank of America, or any of the other big banks putting together the LinkedIn deal—got to buy LinkedIn at $45 a share. The stock opened at $83, lavishing an instant 84 percent windfall on their money.
And those without connections and without the requisite net worth (typically above $10 million, if not $20 million) to gain access to the insider price? LinkedIn’s stock crossed $122 a share before closing at $94.25, meaning some have already seen a big loss in their over-eagerness to own a piece of a hot tech company. Gawker made a lot of sense—there’s a phrase I don’t find myself writing very often—when Ryan Tate summed up the LinkedIn public offering this way: “Now that the social networking bubble has reached the masses, it isn't just annoying, it's dangerous.”
But LinkedIn is a single company. And as crazy as its stock market debut was this week, it still doesn’t come close to matching the laughing-gas nuttiness that marked the second half of the 1990s. LinkedIn made all of $15 million in profits last year, but at least it was profitable. Compare that to TheGlobe.com, the company whose IPO near the end of 1998 stands as a signal event in the dot-com boom—the can of gasoline, as it were, that caused the conflagration that came to so ignoble an end at the start of 2000.
TheGlobe barely had any revenues when it went public. It booked a paltry $415,000 in the last full year before going public. (LinkedIn, by comparison, could claim $243 million in revenues in 2010.) It lost $3 million that year and was on pace to lose another $15 million in 1998. That made no difference to those wanting a piece of the company: The investment banks priced TheGlobe at $9 a share, but within minutes of its debut, investors were already paying more than $90 a share.
But that didn’t stop Jim Cramer, the CNBC mad man, from making a comparison between LinkedIn’s debut and TheGlobe, as if this were 1998 all over again. “This is going to be another one of these things where we destroy everybody,” Cramer said in his usual, cringey, over-the-top manner. “I see it happening again.”
The truth is very few companies these days are able to go public, and David Menlow, president of IPOfinancial.com, an independent research company, doesn’t see that changing because of LinkedIn. Hard lessons were learned during the dot-com bubble, and that means that only established companies with significant revenues.
“There’ll be a very tight mesh on the screen door,” Menlow predicts. “It’s not like you’re going to see any company that can claim it’s a social networking company go public.”
Journalist Gary Rivlin is the author of five books, including Broke, USA: From Pawnshops to Poverty, Inc.—How the Working Poor Became Big Business. He has worked as a staff reporter for The New York Times, where his beats included Silicon Valley and New Orleans after Hurricane Katrina. He is a special correspondent for Newsweek and The Daily Beast.