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Monday
May232011

Tech Bubble? LinkedIn IPO Has Watchers Wondering

Jupiterimages/Polka Dot(NEW YORK) -- Ever since LinkedIn's IPO rocketed skyward, raining money on the company's founders and on early holders of the social networking stock, market watchers have been wondering: are tech stocks poised for another leap to the moon? Are we seeing the re-birth of a '90s-style bubble?

LinkedIn's stock, issued at $45, went as high as $122.70 its first day, closing at $94.25. Day two saw another 14 percent rise before profit let out a little steam, and the stock declined by 1.2 percent. Based on Friday's closing price, the company's market value stands $8.8 billion--about 23 times revenue.

"By any normal valuation, that's awfully high," says Norm Conely, CEO of JA Glynn Investments in St. Louis.

The stock's performance, says Josh Bernoff, senior vice president at Forrester Research, is "not in line with any flavor of reality I know."

The Wall Street Journal on Monday reckoned that based on LinkedIn's 2010 profits and market value, if Exxon Mobil had the same valuation it would have a stock value of $19.8 trillion -- well north of the U.S. annual gross domestic product.

The business prospects for LinkedIn, Bernoff admits, are excellent. "There's a lot of potential for growth, both in terms of revenue and membership. When you need to connect with other professionals, LinkedIn is perfect. They dominate that space." But that space is limited. "It's not your whole life."

Kathy Smith, principal with Renaissance Capital, an IPO advisory firm, says the IPO's spectacular success was fueled by more than fundamentals.

"Some people are saying," Smith says, "that the underwriters mis-priced it. But I don't agree. They thought they were pricing it with the fundamentals in mind. The social networking community priced it differently." The people in that community, she calls enthusiasts -- "not your typical investors." Some of them are too young to remember the tech bubble of the '90s or how badly buyers ultimately got singed.

In that spectacular run-up, Internet-based companies by the dozens went public with no profits, little revenue, and lots of dreams about getting in the space first and attracting site visitors. The dotcom bubble of 1995-2000 saw the tech-heavy Nasdaq soar to 5,000 points then crash to less than 1,500 -- losing trillions of dollars for investors.

What we're witnessing now, Bernoff says, is not the birth of another bubble. "If Facebook went public tomorrow, you'd see the same frenzy. Its potential is much greater than LinkedIn's. But I'm concerned than in the next few quarters LinkedIn's true potential will become clearer and cause some people to become disillusioned. They'll see it doesn't actually have a patent on fairy dust."

Copyright 2011 ABC News Radio

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