NEW YORK, May 19 (IFR) - To describe the LinkedIn IPO in the context of too much demand and not enough supply is an understatement. Rampant investor interest led to a predictable outcome of a soaring aftermarket performance, with little consideration to the actual offer price. Institutions that managed to receive an allocation are not alone in counting their blessings.
LinkedIn LNKD.N shares opened this morning at US$83.00, traded as high as US$122.70, and settled this afternoon at around US$106.00, well more than double the US$45.00 offer price. Telling of the short supply, the volume stands at roughly 24m shares - and counting, more than a three-fold turnover on the 7.8m share placement. One theory for the wild swing is that bearish investors got caught wrong-footed and were forced to cover in the aftermarket.
“I got 500 shares and was told to consider myself lucky,” said one hedge fund manager, who flipped his holdings in the low-80s. “‘There are billion-dollar institutions that are not getting any stock,’” he added of the communication from the salesperson at one of the leads.
To be sure, joint-bookrunners Morgan Stanley, Bank of America Merrill Lynch and JP Morgan did their best to communicate the strength of investor demand, increasing price talk early in the week to US$42-$45, from US$32-$35, and tempering expectations. Ahead of pricing, they confidentially indicated the extent of their dilemma: multiple-times covered, 600 institutions, a 90% hit ratio from one-on-one meetings, and little price sensitivity, according to one ECM source.
Obviously more aggressive pricing was possible, but only to the extent allowed by a 20% increase in total deal size (roughly US$54.00) allowed by the SEC without having to re-circulate. LinkedIn insiders were understandably reluctant to increase the 3m shares sold on the offering - none of the three-largest holders, Sequoia Capital, Greylock Partners and Bessemer Venture Partners, sold on the deal.
The more relevant question is whether the US$4.25bn valuation at pricing - some US$10bn in the aftermarket - is warranted. It is impossible not to recollect similarly impressive performance prior to the implosion of the Internet bubble - already, LinkedIn’s market capitalisation would put it near the top-half of those for companies in the S&P 500 Index (median of US$11.5bn).
“A big difference between then and now is that LinkedIn has a demonstrated business model that produces revenue and profits and is still growing rapidly,” noted Jay Ritter, professor of finance at the University of Florida. “It’s not like people are valuing this based purely on the basis of eyeballs,” he added, alluding to the practice of valuing Internet companies based on the number of hits.
Indeed, LinkedIn is a very real business, with trailing earnings of US$15.6m on revenue of US$292.3m for 12 months ended March 31. On a run-rate basis, revenue will grow to roughly US$375m this year, though the company concedes it will not turn a profit as it expands marketing efforts - analysts at one of the leads offers up revenue figures of US$400m in 2011; US$580m in 2012; and US$750m in 2013.
Significantly, say buy-side sources, LinkedIn generates roughly half of its revenue from companies looking to hire. Another 30% comes from advertising revenue, and just 20% from fees for premium services charged to its 102m members. Believers point to the targeted nature of its membership base and the fact that it is the first true social media company to go public.
“This is a core position for us,” said a second hedge fund manager that participated and held onto the allocation. “We are a true believer,” he added, projecting revenue in 2013 of US$1bn.
Facebook, Groupon, Zynga and Twitter, which along with LinkedIn comprise the so-called big five consumer Internet companies, must be convinced as well. All are generally expected to go public in 2012.
Stephen Lacey is Deputy Editor of IFR Americas; Tel: 1-646-223-8808