Tag: LNKD

Facebook IPO and social media

All of the financial journalism out there is directed toward Facebook’s IPO and the fact that the price dropped after offering. Here’s a cool chart after the $38 IPO:

There is no requirement for IPOs to rise in price after they go public. In fact, the huge price spikes seen in IPOs (especially during the internet stock era) simply represents a mispricing in the IPO price – in the usual case where a hot IPO spikes up on the first day of trading, the difference between the market price and the IPO price is cash that went into IPO purchasers’ wallets instead of the underlying company.

In Facebook’s case, however, the offering was for new equity and also selling stockholders – Facebook itself sold 180 million shares of stock (raising $6.76 billion net), and insiders sold 241 million shares (liquidating $9.07 billion net for themselves).

Notably, a week ago, the insiders were slated to sell 157 million shares. This was bloated up by another 84 million shares and raised a cool $3.157 billion net for those insiders. They had a vested interest in the IPO price being high and not low, so in classic form, Wall Street of course fleeced investors once again. I don’t sympathize whatsoever with the investors of the IPO simply because they were trying to make exactly the same dollar that the selling shareholders made off of them.

I’m not going to offer any critique on valuation, but an investor in Facebook shares is investing mostly for the ride and not for control – insiders control most of the Class B shares, which has 10 votes, while the offering is for Class A shares, which has 1 vote per share. Thus, CEO and founder Mark Zuckerberg will have 58% voting rights and 44% economic rights after the offering. This will shift over time as insiders cash out their Class B shares (they will convert into Class A and then be liquidated into the market).

The top of the tech IPO market in the last decade was the IPO of Palm, which went for nearly a hundred dollars per share when it went public in March 2000 before crashing to earth during the tech wreck. Is this broken IPO a sign of what’s about to happen in the social media space? Companies like LinkedIn (Nasdaq: LNKD) and Yelp (Nasdaq: YELP) and Groupon (Nasdaq: GRPN) come to mind. I will make a concession that Groupon is not exactly a “social media” company but I will lump them in that space.

Fundamentally, Facebook reminds me of what AOL or Compuserve was back in the 90’s. After acquiring Compuserve, AOL managed to sport a huge market capitalization before crumbling into obsolescence and I suspect that Facebook will follow the same trajectory. The question is whether there is still any growth left in Facebook, or whether the business at this point is strictly about monetization and nothing else – before it manages to get rid of all of its customers with relentless spamming and other useless features which will degrade the product.

Perhaps I am biased since I do not have a Facebook account.

LinkedIn valuation

LinkedIn (Nasdaq: LNKD) went public on Thursday and many people became very rich, especially as it traded over twice as much as its initial offering price of $45/share. You can be sure those insiders are just dying for the holding period to expire before they start dumping their shares into the marketplace.

Looking at their financials reveals a company that has about 95 million shares outstanding after this offering, plus another 16 million options that are deeply in the money gives a diluted share count of about 111 million shares. Multiply that by Friday’s closing price of $93/share gives a company with a capitalization of $10 billion. This puts it on line with technology companies such as Sandisk (SNDK) and Checkpoint Software (CHKP).

The company has increased revenues dramatically from its inception ($120M in 2009 to $243M in 2010) but the company has also increased expenses to obtain those revenues – as such it is marginally profitable. It can be expected to make money in the future, but how far can it scale up before they hit the law of large numbers and their revenue growth starts to taper?

It is interesting to note that the original site on the internet for jobs, TMP Worldwide, now known as Monster (NYSE: MWW) has a capitalization of $1.85 billion, expected 2011 revenues of $1.1 billion and expected 2011 profitability of $52 million.

Obviously the media will portray this IPO as the rise of social networking sites (just as how the Netscape IPO started the rise of the internet boom), but as history as shown, whether these companies will be able to justify their lofty valuations or not remains to be seen. I don’t have any other comment than that I will be looking elsewhere to deploy my capital – the insiders in LinkedIn (even the ones getting in as late as April 2011 got their options at an exercise price of $22.59/share!) will be the ones making the money, not the public.