Shares of newly public LinkedIn Corp. soared by as much as 173 percent at one point Thursday morning on the heels of its highly anticipated IPO, underwritten by Morgan Stanley, Bank of America Merrill Lynch and J.P. Morgan. The IPO was priced at $45 per share, or a $4.3 billion valuation, and LinkedIn stock hit $122.70 per share in afternoon trading.
Some are crying tech bubble, but analysts say the company’s diversified revenue streams and growth potential can’t be ignored.
After Facebook, Mountain View, Calif.-based LinkedIn has proven to be the most successful social network with more than 100 million users and a focus on business professionals. It draws revenue from premium subscriptions, online advertising and job postings.
Rick Summer, analyst with Morningstar Inc., wrote that the professional information LinkedIn collects about its users will give it an edge on Facebook and other networks. For employers it is an easy way to search for new recruits and hiring solutions account for more than 40 percent of the company’s revenue.
“The industry is young, but we are very positive on the prospects for LinkedIn. Still, even good companies should be bought for less than they are worth,” he wrote.
Summer gave a fair value estimate of $27 per share and must be shaking his head at the company’s huge gains on its first day public.
For LinkedIn investors, patience will be key, as the company stated in a pre-IPO SEC filing that they do not expect to be profitable in 2011. Though revenue hit $243 million in 2010, the company plans to invest heavily in future growth and notes significant industry competition (professional network Viadeo tops LinkedIn in China, India and Brazil) as a potential earnings risk.
As Summer wrote, “There are competitors with substantially more financial resources that may either steal market share or depress the operating margins the company earns.”
Has this opened the floodgates for social networking company IPOs?
Sandeep Aggarwal, analyst with Caris & Company Inc., says it is very likely.
“The 100 percent plus increase in the LinkedIn IPO highlights how much appetite investors have for a quality social media name,” he said. “This paves the way for other social, mobile and local companies to take advantage of a very healthy capital market situation.”
Mitchell Petersen, chair of the finance department at the Kellogg School of Management, says we can expect to see entrepreneurs rush into the social media sector, creating an overcrowded marketplace typical of boom/bust cycles.
“We look at the past, we assume it will be the future and we tend to overshoot,” he said. “The brain says we know this is going to come, but the heart just can’t resist.”
LinkedIn closed Thursday at $97.19 per share.