May 24, 2011
For those not versed in corporate law, an initial public offering, or IPO, is when a company offers sale of its stock to the public for the first time, making its stock value subject purely to market forces.
Prior to an IPO, a company many have had one owner, or multiple private shareholders, including individual persons and investment institutions.
After an IPO, company stock is publically-traded (though large portions of the stock are typically retained by individuals seeking to maintain control of the company), and the stock price fluctuates just like the rest of the stock market.
LinkedIn’s IPO is significant for several reasons.
It was a massive success, closing at $94.25, which was over double its initial offering price of $45.
With 94.5 million shares, LinkedIn’s value is currently somewhere just under $9 billion.
That’s an impressive number, especially considering its net income was $15.4 million in 2010 (according to its IPO filing with the SEC).
2010 was also its first profitable year (except for 2007, which saw a net income of only $328,000).
That makes LinkedIn’s price-to-earnings ratio (P/E ratio) at a whopping 578 (for those sticklers, this is the trailing P/E ratio).
A company’s P/E ratio is a measure of the price paid for a share relative to the annual net earned by the company per share.
Just as a point of reference for LinkedIn’s 578, Apple’s P/E ratio is currently 16. Google’s is just over 20.
What do all of these figures translate into?
There’s actually a bit of debate about how much P/E ratios matter.
Historically, though, many companies with high ratios that don’t turn correspondingly high profits in the near future have been abandoned by investors, translating into a dive in stock prices.
Does this portend a second dot com bubble?
Well, one company usually isn’t enough to create a “bubble.”
But we won’t have to wait to find out if more dot com companies are going public.
Pandora Media, owner of internet radio service Pandora Radio, filed its IPO papers with the SEC on February 11, 2011.
Zillow, Inc., an online property valuation service, filed for an IPO on April 18, 2011.
With LinkedIn’s massive IPO success, it is only a matter of time until other companies, most notably Facebook and Groupon, will be making filings of their own.
So what’s different this time as to not classify this growth as a bubble?
Unlike the dot coms of the late 1990s, LinkedIn and other dot coms of today have an actual history of and model for growth.
More importantly, these companies are operating in an environment that isn’t almost completely speculative.
The internet today is not the same place it was 10 years ago.
With the advent of mass social networking, it is integrated with the real world more than ever, perhaps inextricably so.
Does this mean that LinkedIn will be able to meet investors’ profit expectations?
Not necessarily, but that’s beside the point.
The relevant question is whether the internet, and social networking in particular, will continue to be a central part of people’s lives.
I think we all know the answer.