I’ve had a bit of a back and forth on Twitter in the last day with Business Insider’s Joe Weisenthal, after BI CEO Henry Blodget yesterdaytweeted “And now a chorus of morons will howl about how LinkedIn’s IPO is proof of new tech bubble.” Weisenthal followed that with “Actually, shouldn’t mock the “LinkedIn Is A Bubble”-crowd. As @ryanchittum pointed out, journos should default to yelling bubble.”
True to Business Insider form, that’s not what I really said when I wrote “it’s the press’s job—as it would have been in 1998 with the tech bubble, or 2004 with the housing bubble—to be very, very skeptical of these things (high tech valuations) before they get too out of hand.”
So what did I mean if I wasn’t saying “default to yelling bubble”?
The Wall Street Journal gives us a good example this morning in a story on the front of the Marketplace section. Here’s the headline and subhed:
LinkedIn Price at High End
Site’s $4.25 Billion Valuation Raises Eyebrows; Supporters Point to Growth
That’s pretty straightforward. It gives us the news while nodding to what it may say about a broader story, and it throws in the counterargument to boot. Good stuff.
And here’s the third paragraph, which throws up several warning flags for the reader:
The offering of 7.84 million shares—the biggest U.S. Internet IPO since Google Inc., analysts say—has been a controversial one, as many across Silicon Valley and Wall Street say that investors are being taken in by a new Internet bubble. LinkedIn’s IPO documents frequently refer to “key metrics” of Web site visits and page views that evoke the investing craze of the last decade. The company made only $15.4 million in 2010.
Unfortunately, the WSJ short-arms this story. It doesn’t give us key data that it should have to fully tell the LinkedIn valuation story. Where’s the revenue number, for instance? That’s basic, must-have stuff, and it’s not here.
The only numbers we get are that LinkedIn had a $15 million profit last year and, that “The sale of hiring tools to recruiters made up 49% of first-quarter revenue, up from 27% in 2008,” which means just about nothing without context, and user numbers, which have gone up an impressive tenfold in four years and are still growing fast.
If you combine the WSJ’s LinkedIn story with ones in The New York Times and Financial Times today, you’d probably come up with a pretty good piece. On its own, though, the NYT and FT fall short, too.
The NYT buries any mention of concerns over tech valuations in the third-to-last paragraph:
Still, analysts have raised concerns that LinkedIn’s valuation is running ahead of its fundamentals. The company recorded revenue of $243.1 million in 2010, with net income of $15.4 million. It also warned investors, in its recent filing, that it expected its revenue growth to slow as costs increased. It said it did not expect to be profitable in 2011.
But those last two sentences there are key pieces of context that the Journal ignores. The company says its revenue growth is slowing and it will lose money in 2011. Even this is problematic, though. The Times says “it expected its revenue growth to slow as costs increased.” That doesn’t make sense. Sales don’t typically slow because costs go up (unless costs go up so much you have to jack up prices), but earnings do. And that paragraph is followed in the next graph by this:
Based on its current growth trajectory, LinkedIn is selling for roughly 46 times 2011’s projected earnings, according to Abelardo Mendez, an analyst for GreenCrest Capital.
Um, you just told us two sentences earlier that LinkedIn wouldn’t have any earnings in 2011.
The Financial Times handles the bubble angle well, reporting this up high in its story:
The level of interest has added to questions about whether internet stocks have become overheated because of scarcity value.
“They’re getting incremental demand not even directly as a result of their business, but as a result of having scarcity in the social networking space,” said Reuben Daniels, co-founder of EA Markets, a capital markets advisory firm.
And it gives us some multiples and compares that to a social-media peer:
LinkedIn’s valuation - at 17 times last year’s sales of $243m - will still lag behind that of Facebook in private markets. The biggest social network is valued at 32 times estimated 2010 sales, according to Nyppex, a private share market.
But the FT story has holes, as its short stories typically do. It doesn’t say anything about earnings or growth rates, which is baffling. And nobody, as far as I can tell, reports what LinkedIn’s projected revenues for 2011 will be. That also should have been in these stories.
The Journal’s Evan Newmark, a former investment banker whose good column on IPO bubble dynamics confirms that LinkedIn’s revenue growth is slowing, has some more numbers:
After all, what is the sense in putting a $4.3 billion valuation on a company with slowing revenue growth and zero projected profits for 2011 or in paying $43.50 for a share that post-IPO will have a tangible book value of just of $3.38, or one-thirteenth what you just paid.
Of course, there isn’t much sense. But that doesn’t matter. Here’s what does: The belief that someone out there will pay even more for the shares.
Newmark’s numbers and all the other ones above are based on LinkedIn’s IPO pricing of $45. As I type this, the stock is up a stunning
99 105 122 135 percent in its first couple hours of trading. So all these high multiples from above? More than double them.
LinkedIn is now worth $10 billion on the stock market. Which means it’s trading at 41 times last year’s sales—higher than Facebook’s huge valuation. It has a trailing price-to-earnings ratio of 650 (and remember, it will lose money this year). Newmark’s tangible book value number is now one-thirty-first of its stock price.