Investors' soaring expectations for the Internet's hottest trend are about to be put to the test as the first major U.S. social networking company to go public hits the market.
Amid the greatest tech frenzy since the dot-com era, LinkedIn Corp. announced Wednesday that its initial public offering will be priced at $45 (U.S.) a share. Demand for the shares, which will start trading Thursday on the New York Stock Exchange, has been so high that LinkedIn pushed the price range for the IPO up by 30 per cent earlier this week.
The market's reception of the offering is likely to determine whether other social networkers, including Facebook Inc., Twitter Inc., Groupon Inc. and Zynga Inc., decide to follow suit and go public in months to come. But the rich pricing of the LinkedIn IPO is raising fears that investors are buying into an overpriced sector.
"LinkedIn's IPO is a litmus test for the other social networking platform companies," said Bill Buhr, IPO strategist for investment research firm Morningstar Inc. He added: "The market is very frothy."
LinkedIn's IPO price puts a market value of about $4.1-billion on the site, which lets people post résumés and exchange information. Based on the company's most recent annual results, the shares will begin trading at a lofty 17 times sales and about 260 times earnings. By comparison, Google Inc. trades for about six times sales and 21 times earnings.
Until now, the only way to put a valuation on social networking sites has been to observe the trading of shares on private exchanges. These platforms allow insiders of private tech firms a forum to cash out their shares. They also let high net worth individuals buy into a company before it goes public.
Based on prices on the private exchanges, various media reports put Groupon's value in excess of $20-billion and Facebook's as high as $70-billion. But those price tags are based on incomplete financial information about the companies.
LinkedIn, based in Mountain View, Calif., posted profit of $15.4-million on sales of $243-million last year. Its performance in the public market will signal what kind of valuations are sustainable for social networking firms. The company is listing at an opportune moment, with the market for IPOs in the U.S. on course for its best year since at least 2007, and the technology sector at the forefront of that wave.
Facebook, Groupon and Zynga have talked about going public, with many expecting Facebook to make its debut in 2012. But if LinkedIn's offering proves successful, schedules could accelerate, Mr. Buhr said.
"It could potentially light a fire under each of them to say, hey, let's get our offering going … investor demand for these companies is just ridiculous," he said. "The IPO market works in a weird way. Just because the window is open now doesn't mean it will be in six months."
Recently a number of Chinese Internet firms have come to market in the U.S. with mixed results. The most recent was on May 4, when social networking site Renren Inc. made its debut on the New York Stock Exchange at $14. The shares rose to $18 on the first day of trading but recently traded down at $13.63.
NetQin, a mobile security services firm, priced at $11.50 a share, and fell 19 per cent on opening day. The shares traded recently at $7.49.