Is the Market Creating a Social Media Bubble?
May
20
Written by:
5/20/2011 8:12 PM
Having eagerly followed
LinkedIn's IPO and first trading day, I can't seem to shake that strange feeling of deja vu. LinkedIn shares traded as high as $122.70, closing at $94.25, a whopping 109% premium to the company's listing price of $45 per share on the
NYSE. It's certainly not the first time a company's first trading day has created a frenzy and pushed shares significantly higher...but the thing that worries me are the all too familiar parallels to the late 1990's early 2000's dotcom boom and bust.
According to
Bloomberg, at the close, LinkedIn was valued at $8.91 billion dollars, some 24 times 2011 revenue (annualised from first quarter revenue figures). Should common sense prevail, I feel there may very well be some punters walking away from LinkedIn a little lighter in the pockets in the not too distant future. What worries me more however, is the possibility that the share price won't drop to more realistic representations of the company's value, and that in a parallel to the dotcom boom and bust, the share prices may continue north resulting in the disappointment of profits never actually growing at the rate punters are anticipating. Subsequently, the disappointment turns to much much larger losses to those caught up in the hype.
I'm certainly not suggesting that LinkedIn is just another dotcom bust waiting to wreak havoc on investors in the future, I am simply stating that I feel that the market hype surrounding Social Media and the associated businesses may be creating a dangerous bubble ripe for the pin prick. LinkedIn is without doubt a dotcom business creating real revenues and no doubt profits, now or in the future, of a size worthy of investment. However the question remains as to whether LinkedIn,
Facebook or any other big name Social Media businesses and start-ups can produce lasting growth and returns to shareholders, to warrant such extreme valuations. Personally based on LinkedIn's current valuation and a comparative valuation of Facebook (using the same multiples of revenue, Facebook would be valued at around $95 billion, according to
Bloomberg) I would think not.
Being a little more biased towards value investing, and the hunt for disliked and shunned quality businesses, I've got to be honest and say that I will be endeavouring to steer myself clear of the market hype surrounding recent and upcoming IPO's of Social Media start ups. Something about picking up quality business's below their intrinsic value makes a lot more sense to me than paying extreme premiums for an unknown growth potential.