LinkedIn IPO prices at $45 per share, but risks real
NEW YORK (Reuters) - LinkedIn sold $352.8 million worth of shares in its initial public offering on Wednesday, signaling that stock investors are eager to buy shares of social networking companies even if valuations are lofty.
LinkedIn sold 7.84 million shares for $45 each, a higher price than the company was expecting even earlier this week.
The strong investor demand for the offering bodes well for other social networking companies expected to go public in the coming months, including Facebook, Groupon, Twitter and Zynga.
While the companies have significantly different business models, they each tap social networks and the valuations for each are skyrocketing.
LinkedIn is a nine-year-old company that as of Wednesday is worth $4.25 billion. Facebook, which is expected to go public in April 2012, was valued at $70 billion in recent sales of the company's private shares, up from $50 billion at the beginning of the year.
"There is a feeding frenzy is going on," said Ben Howe, chief executive of boutique investment bank America's Growth Capital.
But to proponents of the value of connecting people online, the high market values of these companies may make sense. LinkedIn, for example, is an excellent way for companies to reach prospective customers, one venture capitalist said.
"Social networking is the most efficient customer acquisition strategy in the world," said Saad Khan, a partner at venture capital firm CMEA Capital.
Groupon, which brings people together for deals, has had talks with bankers about an IPO that could value it at $15 billion to $20 billion.
Yet, even with all of the hype, there has not really been a test of how hungry public investors are for these stocks. LinkedIn is that test, and evidently demand is strong.
Investors were willing to buy LinkedIn shares despite that fact that they come with fewer voting rights than the shares held by LinkedIn founders, managers and staff.
The company's shares were sold at about 17.5 times the company's 2010 sales, compared with Google's valuation of about six times.
America's Growth Capital's Howe said it could be difficult for LinkedIn to sustain that high valuation.
"There are companies that are going to have very strong positions in massive markets such as Facebook," Howe said.
"But I think most of the other companies that are riding on their coattails and getting these enormous valuations do not fit the same profile and are just extremely overvalued," he added.
One of LinkedIn's biggest risks may be its gutsy bet on its future growth -- combined with an admission that it does not expect to be profitable in 2011 on a U.S. generally accepted accounting principles (GAAP) basis.
"Frankly, they're a little bit arrogant saying, 'We're going to have a great IPO, but we're also going to lose money this year,'" said Francis Gaskins, IPOdesktop.com president.
After two years of losses, LinkedIn made money for its common stockholders in 2010 -- but then it was back to breaking even in the first quarter of 2011.
In the risk factors section of its prospectus, LinkedIn said the rest of the year could be the same, or worse:
"Our philosophy is to continue to invest for future growth, and as a result we do not expect to be profitable on a GAAP basis in 2011," the company said.
LinkedIn added that it expects its revenue growth rate to decline over time and its costs to increase.
The risk factors section of any prospectus is designed to encapsulate worst-case scenarios.
But many investors would not likely be pleased with a profitable company flatlining or swinging to a loss in its first year as a publicly traded stock.
Earlier this week, the chief executive of LinkedIn's French rival, Viadeo, told Reuters his venture would delay its IPO, in part because of concerns of having to answer to shareholders about profitability.
Another peculiar fact about LinkedIn is that it's not quite the Internet company most consider it to be.
Most of the biggest social networking sites mainly make their money through online advertising or Internet services.
LinkedIn is an online platform but actually makes more money through so-called field sales, or a sales force directly soliciting customers, agencies and resellers.
In 2010, fifty-six percent of LinkedIn's net revenue came from field sales, while 44 percent came from online sales.
"(Feet on the street) is an expensive sales force," IPOdesktop.com's Gaskins said. He added that almost half of LinkedIn's business comes from selling "hiring solutions," which help match companies and job-seekers, a space where LinkedIn could face tough competition from niche job-seeking sites and traditional recruiting firms.
Underwriters on the IPO were lead by Morgan Stanley, Bank of America Merrill Lynch and JPMorgan. The company's shares are expected to begin trading on the New York Stock Exchange on Thursday under the symbol "LNKD."
(Reporting by Alina Selyukh and Clare Baldwin; Editing by Dhara Ranasinghe, Andre Grenon and Steve Orlofsky)