LinkedIn's Ballooning IPO Price Looks a Lot Like a Bubble

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Over the course of a week, the valuation of LinkedIn leading up to its initial public offering on Friday jumped 30% from $3 billion to $4.1 billion. According to SEC filings, the social network for professionals will sell shares  7,840,000 for $42 to $45 rather than the $32 to $35 range announced last week. Reuters reported this morning that despite doubling revenues over the course of the past year, LinkedIn will not report a profit "based on U.S. generally accepted accounting principles." Not since the final fateful days of the dot-com bubble in 2000 has America seen an IPO price inflate so quickly.

Will LinkedIn be the first casualty of the social media bubble? Or will they be the first success story? That ought to depend on the investors, but analysts already seem pretty skeptical based on precedent. With companies like Facebook mulling over an IPO in the neighborhood of $100 billion--a whopping 50 times its expected profits--skeptics say that social media companies are dangerously overvalued. (LinkedIn's valuation versus earnings profile is even more extreme--$4.1 billion puts LinkedIn's valuation at 88 times their earnings.) The outcome of a similar social media company's IPO doesn't give reason for optimism. Though initially surrounded by fanfare, a Chinese version of Facebook called Renren hit the markets at $14 per share and soared 50% only to plummet soon thereafter. Shares now trade at about $12.50.

Venture capitalists hardly seem worried. Citing differences in the dot-com bubble ten years ago and the more stable tech community today, prominent voices in the VC community like Chris Dixon and Fred Wilson--who have both invested in social media companies--have argued that talk of a new bubble is more or less hype. The two do have a point, concedes Forbes' Steven Bertoni, but the market for these companies is largely based on hot brand names like LinkedIn and Facebook rather than real revenue figures. Which basically translates into saying that the fervor over social media companies is also more or less hype. 

After the bell rings Thursday and LinkedIn begins trading the New York Stock Exchange under the symbol LNKD we may learn whose hype is warranted. In the meantime, "investors have to put their money somewhere," as one analyst told Reuters. This anonymous banker, for one, is going "to load the boat" with LinkedIn shares.

This article is from the archive of our partner The Wire.