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$8.9 Billion LinkedIn Valuation Isn't All that Meets the Eye

Site's IPO worth watching for signs of bubble, however
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LinkedIn, the professional networking site, held its initial public offering on Thursday, closing at $94 per share and an $8.9 billion valuation. The 137 percent rise on a stock that started trading at almost twice its initial offering price drew due concern. Had we at last arrived at a bubble to rival that of 1999? If you read any news on Thursday, it was nearly impossible to avoid those voicing such concern. “Everybody is toeing around calling this a bubble,” CNBC’s Mark Haines said. “I’m going with a bubble. It’s a bubble.”

$8.9 billion ain’t bad for publicity, but it doesn’t mean as much as meets the eye. Over 90 percent of LinkedIn’s shares haven’t been issued yet. But that $94 price tag has been applied to them nevertheless. By the time the rest of the shares actually go to market, they’ll probably be worth a lot less. “Using the oldest IPO trick in the book, the underwriters only issued 7.84 million shares, thereby creating an artificial shortage,” The New Yorker’s John Cassidy wrote on Thursday. “Even at $90 each, the value of LinkedIn’s publicly issued stock is just $706 million.”

LinkedIn’s executives seem to know that their company is being overvalued. In the IPO prospectus, they write, “We expect our revenue growth rate to decline, and, as our costs increase, we may not be able to generate sufficient revenue to sustain our profitability over the long term.”

LinkedIn’s day-one valuation puts it at 584 times last year’s earnings and 37 times last year’s revenue, according to Dealbook. That’s remarkably high for a company that, many have noted, doesn’t earn a lot of repeat visits, the way Facebook does.

And yet, there are those that hold out hope. The company “has already demonstrated longevity and has risen gradually while other more popular social networks have risen and fallen,” wrote John Gapper, of the Financial Times. “It appears to be being well-managed by [CEO] Jeff Weiner and has developed subscription-based revenue streams.”

Day Two of LinkedIn trading will draw less fanfare than Day One, but the stock’s performance should be monitored closely going forward. Facebook and various other Internet startups are expected to file for IPOs within a year, and in the heady days of so-called Bubble 2.0, LinkedIn’s performance will serve as a barometer for the offerings to come. (Facebook is currently valued as high as $80 billion on secondary markets.)

Meanwhile, LinkedIn now has to prove its worth. Though the company turned a profit in 2010, it lost money in 2008 and 2009. Even skeptics have demonstrated faith in co-founder Reid Hoffman and CEO Jeffrey Weiner, but those two have traditionally focused on the long game. Now, having to report financials, they may feel pressured to produce results. “Short-term fluctuations” may not matter to Weiner, but they’re sure to matter to shareholders.