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Weekend reading: LinkedIn and fears of a new bubble

Weekend reading

Saturday musings and then links to the rest of the Web.

I have almost gotten the money together to buy the full tranche of the new NS&I index linked certificates.

What a faff! Savings accounts that still take a week of working days to transfer your money – that’s surely unacceptable in 2011?

I’m also frustrated that the money I raised from selling a chunk of Halma shares is taking days to become available for withdrawal. This always happens with this particular broker, I presume because I bought the shares in a Sharebuilder account (like the one used for my new HYP) and it takes a while for it to corral my money from other investors’.

In his rollicking read How to Get Rich, Felix Dennis explains how even the super-wealthy struggle to get access to their assets in short order. I know how they feel.

Such issues seem prehistoric, however, in light of the $9 billion valuation given to LinkedIn, the business network that’s mainly used to see who got bored after you left your old job, or to check up on that PR hottie you met at a product launch.

Or is that just me?

Certainly such functionality can’t be worth the $100 per user the FT puts on the company, which notes:

LinkedIn’s rise in value has been extraordinarily rapid. Larry Allen, chief executive of private share network Nyppex, said that investors who had bought LinkedIn’s shares privately earned unusually large returns – as much as a multiple of 5.4 if they had bought the shares a year ago on private markets, when prices were $17.74 a share.

Valuing such companies is of course a black art. I was amused to see how Aswath Damodaran – a professor of finance in New York whose highbrow blog is often worth a read – managed to mislay half the issued share count when he first had a stab at valuation. He’s an expert in valuing growth companies!1

Damodaran eventually decided LinkedIn shares are fairly valued at around $21. They are currently priced at over $100 a share, after doubling on the first day of trading.

This gangbusters performance – and the scores of private technology companies waiting in the wings, including the mighty Facebook – has prompted a slew of articles suggesting Dotcom 2.0 is already upon us, and that by implication DotCom Crash 2.0 can’t be far behind.

The Independent writes:

For those old enough to remember the heady years of the late nineties – when many of today’s young technology entrepreneurs were still in short trousers – the stock market’s new-found fascination with social networking and all-things internet prompts a weary sense of déjà vu.

Even the US treasury secretary Larry Summers has given warning, says Bloomberg:

“Who could have imagined that the concern with respect to any American financial asset, just two years after the crisis, would be a bubble?” Summers, who is now a professor at Harvard University, said at a conference today in Shanghai. “Yet that concern is increasingly raised with respect to American technology, with respect to certain other American assets.”

Summers words have already bounced around the web, although tellingly what he said next is usually lopped off by bearish bloggers. He added:

“That is a reflection of the resumption of confidence.”

Indeed it is. The bearmania that has gripped investors for three years now (for obvious reasons!) means we’re still a long way from bubble conditions in my view. Back in the late-90s, every story reporting on this float would have been titled ‘How YOU can cash in on the next LinkedIn!’

It truly was a remarkable time, and anyone who lived through it is understandably twitchy that it could be upon us again. But one thing I’ve learned from the UK housing market is it takes a long time for bubbles to build.

Yes, as The Economist notes in my links below, that the Shiller P/E is signalling the US market is already over-valued. I expect growing earnings to bring down the ratio, however, not falling share prices. No guarantees of course, and the market is certainly much less of a bargain than a year ago. If you’ve  been overweight in stocks it wouldn’t be a bad time to rebalance.

As for LinkedIn, I’m feeling in a heretical mood.

I wouldn’t buy the shares, but even at 600-odd times earnings and 25 times sales I can see a case for them. This is a unique company, and a profitable one. It’s earnings are growing remarkably fast, albeit it from a low base.

If you want to invest in, say, a mining company, there are literally thousands around the world to choose from. If you want to buy a social networking leader, LinkedIn is one of the very few. One sign of bubble conditions will be if or when we see nonsense like ‘the mobile social network for dentists’ being floated for hundreds of millions of dollars. There’s no sign so far.

Also, LinkedIn’s $9 billion valuation is a drop in the ocean of the market capitalisation: Google alone is priced at $170 billion.

I’m not saying LinkedIn necessarily has a great future, but I can understand why, in aggregate, investors are prepared to put a few chips on the square. We’re still a long way from being at risk of a second dotcom collapse, given we’ve not yet had the dotcom bubble.

Rather, I’d say this is 1997, in comparative terms, rather than 1999.

In terms of new paradigms, it’s commodities and emerging markets that are currently re-writing the history books. Many of the arguments to support their divergence from the mean sound plausible, but so did the tech stock promoters in the late 1990s.

As always, be aware, be diversified, and think long term.

Money and investing blogs

Mainstream media money

  • How to make money in micro-seconds – London Review of Books
  • The Schiller P/E says the US market is over-valued – The Economist
  • Invest in land ‘scams’ revealed – BBC
  • Can you identify star fund managers? – Motley Fool
  • The (commercial property) boom that’s beaten the FTSE – Motley Fool
  • Beat inflation with these high yield shares – Motley Fool
  • Bank of England economist signals interest rate hike – FT
  • (Very!) long-term investment in French apartments – FT
  • How inflation is robbing your cash savings – FT
  • Yet another call to invest in new NS&I certificates – Independent
  • Plan to give bank shares to taxpayers – Independent
  • UK investors pull funds out of emerging markets – Telegraph
  • A generation of priced-out would-be UK homeowners – The Guardian
  • Central, a new Central London freelancer’s HQ [started by a sometime Monevator reader!] The Guardian

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  1. Damodaran’s mistake was to rely on online data, instead of going back to the company’s prospectus, which is a good reminder for any investor. []

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{ 6 comments… add one }
  • 1 RetirementInvestingToday May 21, 2011, 7:14 pm

    Hi TI

    “I wouldn’t buy the shares, but even at 600-odd times earnings and 25 times sales I can see a case for them. This is a unique company, and a profitable one. It’s earnings are growing remarkably fast, albeit it from a low base.”

    I also wouldn’t buy the shares. IMO members of the service are used to paying exactly £0 for the service so how will they ever charge them in the future. At the moment I’m guessing the only people paying are recruitment consultants but the vast majority of the membership are other “professionals”. IMO as soon as the charging needs to start on the “professionals”, which will be required to get earnings some where near that which the valuation demands, they will simple stop using the service or look for an alternative. Barriers to entry are relatively low and so the next free “professional” social network will then start charging exactly nothing. Rinse and repeat. Does anybody remember MySpace or FriendsReunited.

    Of course I could be completely wrong but as a LinkedIn member it’s what I’d do.

    I’m guessing it will eventually just become another job board. Is the biggest one valued at $9B? I have no idea.


  • 2 Deb May 23, 2011, 10:12 am

    I wouldn’t buy the shares either. I recently moved back to a role requiring some networking, and subscribed to LinkedIn to track down previous contacts. However it cannot be used to maintain that network. To do that, you have to do what people have always done, and pick up the phone, see people, have a coffee, and interact. How can they make money out of that?

  • 3 The Investor May 23, 2011, 9:41 pm

    @Deb – Thanks for your thoughts on that. To counter, does Facebook replace having and meeting friends? Also, we need to remember the company is already profitable to the tune of $20 million a year. People are saying ‘how will it make money’ – well, the answer is that it is already making money! It just needs to make more. 😉 Perhaps helping people along with that real world overlap you rightly raise will even be one area where LinkedIn can help, in some currently unforeseen way.

    @RIT – The MySpace issue is a live one. However I think we’re getting towards maturity and lock-in with these nets… I don’t see a new LinkedIn anytime soon. What I *do* see as a big threat is an application or window onto Facebook which let’s you run your business contacts on top of that platform. For the moment Facebook is scuppering any chance of this with its appalling privacy and layering controls, but there’s always the chance it will get its act together.

  • 4 Deb May 24, 2011, 9:39 am

    Hmmmmm I suppose I’m struggling to put into words that the way in which I interact with my work network, differs substantially to my private one. Facebook is highly efficient at getting you to log in frequently and stay online for some time once you are there. LinkedIn does not have the content to attract regular visits – no photos, games, comments and chat. I have trade journals, online blogs (which are also on Facebook) and regular press for my professional interests. It is rather self-defeating to be honest. If I spent a lot of time on LinkedIn, what would my network of professional contacts think, other than “she spends more time online than working”…..

    LinkedIn acknowledges that it needs subscriptions to fill the advertising revenue gap, but how many people are going to pay to get access to a list of contacts that they already have in their diary? RIT is spot on – the only people I see actively using it are recruitment consultants. If Facebook made some changes so that you could easily manage a professional and private version of your account, then it would blow LinkedIn out of the water tomorrow.

  • 5 tony May 24, 2011, 9:40 pm

    As a Linkedin and (moderate) Facebook user, I also can’t see how either is a viable investment at current valuations (although I probably thought the same when Google listed). In addition, until 5 minutes ago, I had no idea how Twitter makes any money at all, so I was intrigued enough to run a quick search on ‘Twitter business model’ to find that they earn from “Promoted Tweets” i.e adverts, and will soon launch commercial accounts (if they haven’t done so already). Perhaps they’ll have enough to pay any legal bills after all 🙂

  • 6 Mark Gibaud June 4, 2011, 2:14 am

    In my opinion Linkedin has no real (scalable) business model and thus no future! There is nothing compelling about the product, and if you argue that there is you’re proabably talking about something that is easily substitutable (like professionally networking through traditional means) which means LI can’t charge for it!

    Dot Crash 2.0 indeed!

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