David Prosser: Searching for the high-water mark in the second dot.com boom


Outlook LinkedIn, the social networking site for professionals that is to make its debut on the New York Stock Exchange today, rather undersold itself when it unveiled plans for the float earlier this month. Pricing was originally set at $32 to $35 a share, valuing the business at $3bn – now, just a few weeks later, LinkedIn has priced the shares at $45, valuing the company at $4.3bn (£2.66bn).

What happened during the first half of May to prompt a 30 per cent increase in the value of LinkedIn? Well, nothing material, that's for sure. The uplift simply reflects the demand for LinkedIn shares that the company's advisers are seeing as they sell its story.

Maybe investors are right to be clambering over one another to secure a slice of LinkedIn. But they might want to consider a little nugget of research conducted by the Wall Street Journal yesterday. Struck by that 30 per cent uplift in LinkedIn's pricing, the Journal went looking for the last time a company bumped up its valuation so dramatically during the short period between announcing its intention to float and coming to market. The answer was that there has been nothing comparable for just over 11 years – since the IPO of the communications company ArrowPoint, in fact, which bumped up its valuation by more than 90 per cent as it prepared to float.

ArrowPoint's IPO was finalised on 9 March 2000; two days later, Nasdaq peaked and the dot.com bubble popped.

This is not to say that LinkedIn's float will presage a similar correction. But it is worth noting again that internet stock valuations have seen a dramatic rise over the past two years, just as they did during the dot.com phenomenon – and that just like then, prices are rising at a much faster rate than these businesses' performance would appear to justify.

To take the LinkedIn example, the latest price range puts the company on a ratio of around 90 times last year's earnings. Assuming its earnings have been rising at a consistent pace, the actual figure today might be closer to 60 times. That's above even the highest multiple so far accorded to Facebook, generally the pace-setter in the latest online boom (and it is twice the multiple given to Google when it floated in 2004, even though its earnings were growing more quickly).

In the end, LinkedIn is worth whatever investors are prepared to pay for it. The same is true for Groupon, Facebook or any of the other hot internet businesses moving closer to a float. Just don't be too surprised if investors are not prepared to pay anywhere near as much in a year or two from now.

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