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Comment by blantonl | Hacker News Reader

LinkedIn made $15 million dollars last year, and they just raised $660 million dollars out of the gate in this IPO. And, this IPO values LinkedIn at somewhere close to 6.5 billion dollars.

A valuation of 6.5 billion dollars on $15 million net income. Let that sink in.

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>>*"they just raised $660 million dollars out of the gate in this IPO"

No, that's not how it works.

LinkedIn priced their IPO at $45/share, meaning they raised $352.8 million. The share price right now has no impact on how much money they raised.

... and remember guys, the stock price is just what the public is willing to pay for it, and is not directly bound by any fundamentals. It's not LinkedIn's fault that their stock is overvalued.

You may say it's not their fault, but if you log in to LinkedIn today you'll notice that all of the "news" articles - now placed in an even more prominent position than normal - are about how underpriced their stock is. Entirely coincidentally, I'm sure.

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The price is set based on market analysis. That's what the company thought they could get for it. The transaction requires willing participants.

Think about the market price of houses before the crash, each buyer and the seller were willing to make transaction. We all know the result. Fundamentals are important as well as prospect of the company. So we should talk about what is that prospect that can make company's current market valuation rational.

True, though it may be that some participants are simply willing to buy the stock with the expectation that they can sell it quickly, for more than they bought it for.

How much of that goes to crystal trophies and high-fiving brokers that made the deal happen?

7% of the total IPO issuance goes to the bankers. This number is consistent across the street. Once upon a time, anti-collusion investigations were threatened because there was no explanation for why every major bank charges exactly 7%

I've often thought that there is no need for collusion if you can exchange minimal information over public, legal channels and know how to work a strategy that assumes a modified prisoners dilemma. You can often see oil prices or airline tickets operating that way. E.g when one airline raises prices, then sees that no-one is following the rise, after which the price comes back down. Or everyone else is ready to raise prices and ticket prices go up.

Yup; if judges presiding over anti-trust suits had read Thomas Schelling's book The Strategy of Conflict, there would be many more broken-up oligopolies than there are now.

They get a chunk of the other 300m.

Actually it looks like more a chunk:

"By underpricing the stock, Morgan and BOFA gave their best institutional clients a gift of at least $175 million"

http://www.businessinsider.com/linked-in-ipo-2011-5-b

A recurring chunk, you mean. =)

They left a lot of money on the table.

This forbes blog suggests an auction would have been fairer, and I strongly agree. Institutional investors who got in on the IPO are just printing money, whereas a google-style auction would have given more of that money to the owners.

http://blogs.forbes.com/greatspeculations/2011/05/19/linkedi...

Not necessarily, since the $45 price was at the top of the range and the issue had already been repriced. We won't know whether the $45 price was optimal or not for a while -- it may seem expensive in 90 days when the price settles down.

But if the public is buying the stock at the $80 range minutes after it opens, isn't that enough to say that the initial offer was lower than what it could be? I don't think you need to know what price the stock is trading at three months from now in order to judge the initial sale value.

That really doesn't make any sense. As anyone who knows the stock market will tell you, if you can guess the price of a stock before the market opens, you'd be a wealthy man. But underwriters are conservative with initial IPO pricings because 1) they have no real idea where a stock will go once it's public and 2) they want the stock to go up after it opens (IPOs that don't do this are said to be "broken" and sometimes never recover).

If LinkedIn wants to capture some of the value from the multiple they're seeing today, they can simply sell (or issue) more stock. Doubling or tripling your IPO price is not a tragedy by anyone's standards.

Those are good points, and I'm not arguing that they left a lot of money on the table or didn't, but what I am disputing is where you said "We won't know whether the $45 price was optimal or not for a while --it may seem expensive in 90 days when the price settles down."

Why does the price 90 days from now matter to the judgement of whether or not the initial sale - today's sale only - was a success? If the price drops below the initial sale value, then $45 today will definitely seem expensive to people buying it 90 days from now. But I don't see where it would mean that the company made a mistake in the initial offer of $45/share - in fact, wouldn't it look like the company got a good deal, in selling the initial shares at above-market-values (in 90 days from now)?

The reason is because (in the absence of clairvoyance) the performance of stocks is evaluated over time. If the price is closer to $45 in a month or two, it'll be easier to say that today's price jump was an aberration. If the price is $180 in three months, it'll be possible to say that today's price is actually too low.

But we aren't discussing the long-term performance of the stock here - we are discussing the wide range between what their initial offer is, and the amount the IPO underwriters got to take home.

Not even wrong.

Forget all the junk you think you know about markets. A stock is something you buy. How many things have you bought that doubled in resale price the day you bought it? I'll bet it's a vanishingly small number.

From a producers point of view such a situation means you underestimated demand for your product, which means you didn't do enough research.

In line with the common stupidity of IPOs, LinkedIn trusted a conflicted party to do that research for it.

LinkedIn paid a fear tax. Fear that if they tried to buck the statu-quo like Google they wouldn't come out as well, fear that if they tried something shockingly new like selling stocks directly to individuals who want them they would fail.*

I don't mind when people note the standard way things are done, but for the love of Bob don't pretend the way the stock market works today is fundamental, immutable, or even close to Good.

* Speed argument on this point: Illegal! -> Benefits from that? -> Ignorant investors protected! -> Uh huh, other externalities? -> Large investors make millions! -> We're done here.

You're assuming that there are enough buyers at $80 to take 100% of the offered stock.

Good point, although the original point still stands: $352.8 million on last year's $15 million. Of course, stock price is a prediction of the future, not necessarily a comment on the past.

Based on there IPO prospectus from sec.gov:

Year; Revenue; Costs; Income 2008; 78,773; 84,282; (4,522) 2009; 120,127; 123,482; (3,973) 2010; 243,099; 223,523; 15,385

expense growth is 46%, 82% yoy. revenue growth is 52%, 103% yoy.

So, you have a company that is growing revenue faster than expenses, has 100% year over year revenue growth, and has just hit the inflection point to be profitable... and you want to place a market average P/E on it?

And just to be clear, an incredibly easy ballpark valuation would be to just take the midpoints of the rev / cost growth and go 3 years out... which gives $1.3B revenue on $1.1B costs = $200M profit. A slightly high market multiple on that (18) would still be only $3.6B. And there will be dilution, selling pressure from insiders whose lockup periods will be ending, lumpiness in the numbers... I certainly would not buy LNKD valued at $8B.

But... I will say that I would be encouraged if I were a shareholder by this:

'The company' chief executive officer, Jeffrey Weiner, said in an interview that he wasn't placing much importance on how his company's stock performed on its first day. Mr. Weiner's stake in the company is now worth more than $200 million.

"To be honest with you, I didn't give a lot of thought to what the opening would be like," Mr. Weiner said. "This isn't necessarily indicative of anything. The market will do what it will do. What we are completely focused on is our long-term plans and our fundamentals, and getting that right."'

(http://online.wsj.com/article/SB1000142405274870481660457633...)

But... I will say that I would be encouraged if I were a shareholder by this

Why else would a CEO say anything different? I've been through an IPO and basically heard the same thing from the CEO.

Exactly.

If LinkedIn can make $243M/year selling to recruiters and job seekers in a recession, what do you think happens when we have a global recovery and the inevitable hiring boom comes?

Might LinkedIn's business be counter-cyclical?

People are going to be 'networking' most intensely when they don't have a job or are worried about their current job. If there are fewer people looking for a job and those people get pulled out of the market more quickly, there's less money to be made from them.

LinkedIn is not likely to make money out of job seekers. Their fastest growing income stream is LinkedIn Corporation Solutions. I'd assume that headhunting is harder during good times, thus I think they are more cyclical than counter-cyclical.

No. It's a-cyclical...even better.

I'll tell you what happens. Recruiters and third parties sign up in droves for the sole purpose to spam the userbase, which ultimately drives members away from the site.

LinkedIn earned their 100 million users by providing a professional networking platform where the users could choose who they network with. When the userbase has less of a choice regarding who contacts them, they'll abandon linkedIn as fast as a teenager terminating his MySpace account.

Recruiters and third parties have already signed up. Everyone uses it. That's the point.

If that is the case, then where is the revenue growth going to come from?

New market segments.

LinkedIn is incredibly successful in IT related markets, mostly in the US.

It's like when Amazon started, it was very successful selling to people involved with the internet in some professional capacity.

Isn't "make" usually used to describe income (profit) rather than revenue?

For comparison, in 1999 Webvan IPO'd at $8 billion, with revenue (not profit!) of $395,000 :)

http://cnet.co/kIKoMh

The actual URL the above shortener points to:

http://news.cnet.com/2100-1040-232534.html

PE ratios are for yield businesses that have been around for decades and with nowhere much to go

With LNKD you should be looking at revenue, competition and market penetration (rev is doubling yoy, three sources, 4500 business customers paying avg. $23k a year, 75% of fortune 100, 60% USA - which means they have a lot of growing to do). they are spending everything that comes in on product development, sales and marketing and R&D - it is all growth phase. $400M revenue this year.

To add - LinkedIn isn't really a 'social' company either since its revenue is not based on ads. They are in the recruitment market, where companies are known to pay tens of thousands of dollars for recruitment leads. And in that regard, they still aren't even exploiting their position as much as they could be (which means they have a lot of room to grow both out and up)

If they wanted to impress skeptics they could cut back all sales and marketing and development and just bank the 450M and pay out a dividend, in which case it would be a market cap of ~$4B, and a lot more love in comment threads on the internet :)

If you read the IPO Filing with SEC, LinkedIn is pouring a lot of there revenue back into company in the form of research and development.

FWIW, they had 250M revenue last year. 15M in earnings might indicate they are aggressively investing in growth. So if you're going to look at that critically, investigate where the other $235M is being spent.

Might be a nice time to short, that is if there is someone willing to be on the other side of that trade.

As long as people are going short, banks have incentive to keep the price high and rake in the interest, using it to keep inflating the price. Only when everyone has stopped believing the price will go down and stops short selling, then the banks can no longer inflate the price and will let it go down. See oil for an example.

Welcome to the rigged game.

and assuming you can find shares to short, and are willing to pay the borrow cost.

During the first 30 days after an IPO, the underwriters are not allowed to lend shares for short sale. Additionally, number of shares are limited. The entire float is not available on the first day of trading. So today, it is probably impossible to short. 30 days from now, it should be available to short.

http://cash.investopedia.com/ask/answers/05/062905.asp

I've heard that larger banks and brokerages (not the underwriters) will start making shares available for shorting as early as Tuesday, which should help ease the share price down.

put options?

Options are available for trading only after a certain number of days (generally 60 to 90 days, but in some cases much earlier than that).

There always is.

Not always. There are some companies that don't have enough liquidity to effectively make that trade or have no investors willing to lend the shares. Not to mention shorting (or options) aren't even allowed yet on this particular stock.

But in this case there is almost a certainty that people would accept your short. I would.

except that's not how shorting stock works. it's not a person-to-person deal.

If you want to know, I tried shorting it at 110 just for the heck of it. tdameritrade says 'this stock not available for short sell'.

Yeah but they sank all their money into tripling the number of employees at the company and investing in R&D. That's exactly what you want to see if you expect large growth.

LinkedIn is clearly focused on long term gains over short term profits.

LinkedIn is not even trying to make net income so it's erroneous to perform much analysis on that number. Yes, it's a lofty number but LinkedIn has been around for quite some time and has very solid and very rapidly growing financials.

It means there's a huge potential for that income and revenue to grow.

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