By Jeffrey Meyers
Is LinkedIn worth the price? No, it’s probably not worth the price, but I don’t think that this is a bubble yet, either. The dot com bubble was pervasive, effecting the valuations of every company that had even the slightest relationship to the web and causing formerly-reasonable investors to finance the creation of infrastructure and technology on the assumption of massive future revenue.
In the tech bubble of the late 1990s there were hundreds of companies getting loopy valuations because they had some connection to the Internet. You had real estate companies laying thousands of miles of fiber to handle the upcoming bandwidth thirst. Even stodgy telecom companies were spending ridiculous amounts on capital expenditures to be ready for the new age. Now you just have a handful of companies getting this kind of attention, including LinkedIn, Facebook, Groupon, and a couple of others. I think we are a long way from being in a bubble now.
Ten years ago people were valuing companies on eyeballs and other metrics that had no relevance to revenues. When I was at Ivory Investment Management, we’d look at private deals. So every week we had 18-year-old kids pitching us on some ridiculous idea that had no business sense. But LinkedIn has real sources of revenue: Advertising, subscriptions and recruiters paying to use the site. People are paying a crazy multiple of revenue for it, but it is a real business.
Today I was looking to see if there was a LinkedIn knock-on effect on the stocks of other tech companies and I just didn’t see it. I think if Facebook and Groupon go public they’ll also get big multiples but that would be the end of it.
I think the web itself was such a larger phenomenon that it touched on every company. But this exuberance for a few key social media firms is not likely to drive investment in any meaningful way or affect your average company.
In the late 1990s, the average company believed that if they launched a web site it would naturally become a distribution channel that would magically allow them to sell more products effortlessly. Bob’s Hardware Store, which used to advertise in the Yellow Pages and on television, was now on the Internet, man. You could touch people all over the country. They could see your products and buy stuff. Every little company could be a star. The truth is that most companies did get some benefit from selling on the web or advertising on it but the benefits were far smaller than their investors imagined when they jacked up their P/E ratios during the bubble. The infrastructure that was built was also necessary but took ten years to saturate rather than the one or two years that were predicted at the time.
My ultimate point in that although LinkedIn’s valuation and IPO action are arguably irrational, I do not see a realistic danger of spillover into other tech sectors or the market as a whole. I just regret, for my investors' sake, not being in the good graces of JPMorgan or Morgan Stanley to get some LinkedIn deal stock when it priced the other day.
Jeffrey Meyers is the founder of Cobia Capital Management, a technology-focused U.S. long/short equity fund in New York. He previously worked as an analyst at Intrepid Capital Management, Ivory Investment Management and SC Fundamental.