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LinkedIn's share price more than doubles in IPO

May 2011

LinkedIn Corp. was a smash hit on Wall Street as its stock more than doubled on opening day in the largest initial public offering by an Internet company since debut in 2004.

But for many investors it was merely a curtain raiser for the main event: Facebook Inc.

After an almost decade-long wait, LinkedIn on Thursday launched the first initial public offering from a U.S. social networking website, seizing the opportunity to perhaps set the pattern for Facebook and other major players in the hot new wave of companies looking at going public.

"People are looking to buy anything that has the words 'social networking' in it," said Michael Yoshikami, chief investment strategist with YCMNET Advisors in Walnut Creek, Calif., which does not own LinkedIn shares.

But LinkedIn's spectacular first day of trading revived memories of the dot-com era of the late 1990s — a bubble that, of course, ended in disaster as technology stocks crashed in the early 2000s.

"This value is insane. Someone found the formula for bubble Kool-Aid. The bubble is back," said investment banker Ken Marlin of Marlin & Associates.

LinkedIn shares rose as high as $122.70 before closing up 109% at $94.25 a share. The closing price gave the Mountain View, Calif., company an eye-popping market value of nearly $9 billion, 37 times 2010 revenue of $243 million. By way of comparison, job hunting site Monster.com, a product of the first Internet boom, has a market cap of $1.9 billion, a paltry 1.7 times sales.

"It was very reminiscent of the good old days in Silicon Valley when a company trades on sentiment, not fundamentals," Yoshikami said.

Still, LinkedIn's jump in its trading debut paled in comparison to the 500%-plus first-day gains of stocks including VA Linux, theglobe.com and MarketWatch.com from the last bubble when many dot-coms had no profits and, in many cases, not much revenue. LinkedIn, by contrast, already is profitable and racked up revenue of $94 million in the first quarter.

And LinkedIn is benefiting from a new willingness among investors to again bet on Internet companies.

"This is the investor class 2.0," said Anthony Valencia, media analyst with TCW Group, which owns LinkedIn shares. "These are the investors who are determined not to miss out on the next big thing. They either were not around or didn't participate in the last Internet boom, or they have forgotten how badly they got burned in the stock market crash."

Scott Sweet, senior managing partner of IPO Boutique, said "astronomical" demand for a relatively small number of LinkedIn shares — 7.8 million — only whetted investors' appetite for social gaming company Zynga Inc., daily deals purveyor Groupon Inc., which spurned a $6-billion buyout offer from Google late last year, and the "granddaddy" of the sector, Facebook.

LinkedIn's warm reception on Wall Street could accelerate the plans of these other social networking companies contemplating a plunge in the public markets in the next 18 months. Analysts say LinkedIn's valuation could end up looking relatively modest.

"This is essentially sounding the all-clear for other companies to come into the marketplace," said David Menlow, head of IPOfinancial.com in Milburn, N.J.

The shares surged despite LinkedIn's warning that it will not turn a profit in 2011 as it invests in new products and technology.

Investors are betting on the prospects of a company that has established itself as the leader in professional networking with three revenue streams: online ads, premium subscriptions and hiring tools for recruiters.

And, unlike tech companies with complex or arcane businesses, people are willing to gamble on consumer Internet companies because they have technology "that people get," Menlow said.

Not everyone is sold. "It's a good business. It's just really hard to justify where they priced it," said Ryan Jacob, who manages the $50-million Jacob Internet Fund. He said he passed on trying to buy the shares in the IPO.

Mutual funds, pension funds and other major money managers snapped up most of LinkedIn's shares. Hot IPOs typically are sold only to investment banks' top customers.

Even as many on Wall Street expect LinkedIn to open the door wide for stock offerings from other social networking companies, few believe that the wave of investor excitement for this industry niche will give a lift to tech stocks in general, or to the broader market.

On Thursday, while LinkedIn soared, the tech-dominated Nasdaq composite stock index eked out a gain of just 0.3%.

LinkedIn's success luring investors could even siphon away interest in other tech companies: The IPO comes at a time when investors are growing increasingly disappointed with the growth struggles of some of the biggest old-guard tech firms, including Hewlett-Packard and Microsoft.

"This is not a 'rising tide lifting all boats,'" Jacob said of the fever for social networking companies.

Some critics said the stock's surge showed that LinkedIn's investment bankers priced the stock far too low at $45 — essentially guaranteeing a windfall for their favorite clients while depriving LinkedIn the full amount of capital it could have raised.

LinkedIn Chief Executive Jeff Weiner dismissed the importance of how his company's stock performed on the first day of trading.

"We spent a lot of time with the right kind of investors — folks who understand the story, the fundamentals, who are in it for the long haul," he told Bloomberg TV.

With the IPO, LinkedIn scored what the industry calls a "branding event," a free marketing campaign targeted to business professionals to boost traffic to and membership on its site, which has more than 102 million members and is adding about 1 million new members a week.

But now LinkedIn also faces the pressures of being a public company and will have to move aggressively to meet investors' expectations, analysts said.

"LinkedIn will have to execute flawlessly," Yoshikami said.

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