The initial public offering of LinkedIn was a great success yesterday, as the shares soared to over $120 a share on the first day of trading, and closed at $94, versus the offering price of $45. An impressive result, although the finance guys at LinkedIn are probably wishing they had set the bar higher, and not given away that double in price. Maybe the market will work itself into a lather over those internet IPOs that may be coming soon, such as Facebook, Zipcar, Zynga, etc., but the general market is nowhere bubble territory.
This graph shows the historical record, comparing the price level of the S&P 500 stock index to corporate profits after tax since 1980. Profits are in blue, stock prices in red:
The two series have tracked each other pretty closely over those 30-plus years, except for that big gap in the period of 1995 through 2002, when the stock market as a whole soared as the internet captured investors' imaginations. Today the two variables are back in line, and the S&P 500 is trading at about 13 times the earnings estimated for the coming 12 months.
Granted, we've just seen very high prices paid for a new generation of concept company, and similar optimism is showing in the private market as well for Facebook. Maybe these companies will grow to meet those confident expectations.
What's different between now and, say, 1998, is that investors aren't trying to project that potential growth broadly to earnings and share prices. In that earlier day, it was unanimous, among the CNBC hypers as well as credible strategists at major investment firms, that the potential of the internet was going to percolate down to every company everywhere. (That was how the word "paradigm" got its bad name.) Today we don't hear talk of how social media will open new vistas and forever change the face of shoe retailing, or whatever. And some of that day's highest-flying companies -- Cisco Systems, Microsoft, Intel -- are today's value stocks. Not to mention names such as Webvan and Pets.com.
This isn't to say that the markets won't get crazy over social media and internet 2.0, or 3.0, but today I don't see it.