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LinkedIn: From a Ridiculous Valuation, Don't Expect the Sublime

The Rapture proved to be a bust, but buyers of the initial public offering of LinkedIn (LNKD) must feel as though they've died and gone to heaven. The stock more than doubled from its $45 IPO price to more than $120 in the first day of trading last Thursday.

LinkedIn has pulled back somewhat, but at its closing price Tuesday of $95.45, it still fetches more than twice the IPO price. As some observers are pointing out, the IPO gave LinkedIn a somewhat ludicrous valuation, so its current valuation must be more than twice as ludicrous.

In a blog post on the Seeking Alpha website, Jens Heycke highlights the frothiness by comparing LinkedIn with alternative purchases that one could make with the $4 billion that LinkedIn was deemed to be worth at the IPO. Inergy (NRGY), for instance, a company that stores, transports and sells propane and natural gas, returns $310 million a year to shareholders, for a yield of 7.6 percent on its $4 billion market capitalization. That figure exceeds LinkedIn's total revenues.

A note to investors from the editors of the Prudent Speculator newsletter, whose work was featured in a recent post, focuses on the fact that LinkedIn traded 30 million shares on the day it was listed on Nasdaq. That's nearly four times the 7.8 million shares sold to the public.

Such comparatively immense volume, the note says, makes "LinkedIn CEO Jeff Weiner look a little silly when he told Bloomberg News: '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.' "
The note goes on to say: "No doubt, the social networking company has a nice little business, but the day-traders and speculators playing in the stock obviously care little about the fundamentals, given that LinkedIn's market capitalization is now $8.8 billion."

With revenue of $292 million and net income of $15.6 million in its latest four quarters, LinkedIn has been trading at about 30 times revenues and 564 times earnings. At that price-earnings ratio, LinkedIn is about 35 times more expensive than the broad stock market.

The Prudent Speculator note puts LinkedIn's valuation in perspective by presenting corresponding figures for some tech stocks that the newsletter recommends. Cisco Systems (CSCO), Intel (INTC), International Business Machines (IBM) and Microsoft (MSFT) all have been trading between 2 and 3 times revenues and between 9 and 15 times earnings.

If the four stocks carried the same valuation as LinkedIn, IBM would fetch more than $2,500 a share and the others - all trading below $25 - would be priced in the mid-$200s.

All four of those companies have had their problems over the years, but they're among the most successful tech businesses ever created. LinkedIn has yet to prove that it's in the same class - it has yet to prove anything at all, really - and even if does turn out to be in the same league, investors are still valuing it as though it's superior to those industry stalwarts by several orders of magnitude.

As recent events - or the absence of them - make clear, it's easy to let expectations run ahead of reality. LinkedIn is priced for nothing short of commercial Rapture, but it may end up taking shareholders back down to earth or someplace even lower than that.

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