Word is out that the season of initial public offerings is upon us. This is not an entirely fresh observation. Nevertheless, the numbers surrounding the offering by LinkedIn Corp., the networking site for job hunters and recruiters and the belle of the IPO May Ball, are worth setting in type (or pixels) -- just to keep in our collective field of vision.
On May 19, LinkedIn’s first trading day, the stock closed at $94.25, a jump of 109 percent from the $45 offering price, putting the company’s market value at a stratospheric $9 billion.
A share of stock is supposed to represent a claim on a company’s future earnings. Though LinkedIn shares declined in the days after its IPO, they were still trading at more than 520 times 2010 earnings of $15.4 million. Considering that the company itself is warning that revenue growth is likely to decline this year, this level seems hard to justify. By comparison, the average price-to-earnings ratio among the Standard & Poor’s 500 stocks is just below 15. On the tech-heavy Nasdaq, the average is 23. Perennial high-flier Google Inc. trades at a ratio of 20.
Of course, the IPO resurgence can be read as a healthy sign that investor confidence is returning after a recessionary drought. High prices just might encourage entrepreneurs to take risks with their capital, creating more startups and much-needed jobs. And who knows, the other hot Internet offerings on the horizon (Facebook Inc. and Groupon Inc., to name two) might fetch high valuations based on strong sales and earnings.
Still, wariness on the part of individual investors may not be such a bad thing. Consider this: Thirty million LinkedIn shares changed hands on the first trading day, meaning that each of the company’s 7.8 million shares traded, on average, 3.8 times. Chances are that the smart money was buying and instantly selling to make a profit, leaving someone else -- small investors? -- holding the bag.
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