Henry Blodget - yes, the man who is in many ways synonymous with the technology bubble of the 1990s when he worked as a Wall Street analyst - has something to say about concerns that the initial public offering of LinkedIn Corp. represents a new bubble: It isn't one.
"Everyone involved in an IPO - from the company that goes public, to the banks who take the company public, to the investors who buy the stock when the company goes public - wants the company to 'beat expectations,' so it's in everyone's interest to make the 'expectations' as low as possible," he said of the IPO process.
He goes on: "So the company going public gives analysts absurdly low 'guidance' and the analysts turn this absurdly low guidance into absurdly low 'estimates.' And then the company proceeds to 'beat expectations' even if they fall short of their own internal targets."
If I understand this correctly, he's arguing that IPOs win because they are always priced too low. Companies leave some money on the table so that you, the investor, can gain when you snap up the shares on the market. Academic evidence suggests that IPOs actually underperform in their first year of life, which tends to contradict Mr. Blodget's thesis, but let's get back to his bubble ideas.
Some skeptics point to LinkedIn's modest earnings of just $15.4-million last year as evidence that the market has gone gaga over networking sites, and is willing to paying absurd valuations for them. This is where the bubble talk and 1990s references come from. However, Mr. Blodget argues that estimates of future earnings are far more important - and these estimates have been low-balled.
"No investor paying $45 a share for LinkedIn [that's the IPO price]thinks that these estimates are really what LinkedIn will do over the next few years," he said. "Paying 45-times 2014 estimated earnings (or 25-times 2014 estimated EBITDA) just isn't something that professional investors need or want to do right now-not with companies like Apple trading at 16-times actual trailing earnings."
He prefers to look at the IPO of OpenTable Inc. , the online restaurant reservation company that went public in 2009 at $25 a share. The shares now trade above $91 and hit a high of $118 in April. When it went public, analysts (using those low-ball numbers) estimated that the company would generate earnings of 25 cents a share in 2010. The actual number was 60 cents a share. And estimates for 2011 were 50 cents, whereas Mr. Blodget believes the company will generate earnings closer to $1 a share.
Back to LinkedIn: Mr. Blodget calculates that the company could generate earnings of $1.50 in 2013, versus estimates of just 57 cents. At a hypothetical $50 a share, that leaves the company with a valuation of 33-times earnings.
"That's a hefty multiple, but it's much closer to reasonable," Mr. Blodget said.
He wrote that before LinkedIn shares began trading in New York. In early trading, they jumped 85 per cent, to $83.36. So, using Mr. Blodget's numbers, the valuation is now 55.6-times earnings. A hefty multiple just got heftier.
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