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Tuesday, May 29, 2012
Perhaps it’s an age thing or maybe my eyesight is on the blink, but by mistake an hour ago I opened a computer file dated 22nd May 2011 rather than the one I’d been working on this morning dated twelve months later.
Yet this error proved prescient. Earlier, I had been writing about the manner in which Facebook has lost more than $17bn worth of value in the space of three days’ trading (that’s the equivalent market capitalisation of BSkyB) and why there’s little sign of this shocking erosion of shareholder value coming to an end when I happened upon a piece I’d written a year ago about LinkedIn.
Regular visitors to this area of the newspaper may recall that last May I described LinkedIn as a “smaller, business version of the ubiquitous Facebook, which recently floated in New York at $45 a share, soaring to $122 before falling back to $94.25. All this on its first day. Remind you of anything? This incredible performance values LinkedIn at $8.9bn; bearing in mind it made a profit of $15m last year, such a valuation seems a little frothy.”
Concerned that we may have been on the cusp of ‘Dotcom Bubble II’, I wrote: “This is entirely possible, which is why I’ll be giving LinkedIn stock the widest possible body swerve…”
It proved a smart move. Less than four weeks later, the company’s share price had plummeted by more than 32pc to $63.71. For me, such a rapid drop would have triggered a painful stop loss well before it reached that level and while LinkedIn’s share price fell even further, to below $60 by the end of November, it has since improved and now trades between $96 - $100. Frankly, however, I still believe that’s far too high.
Unlike Facebook, LinkedIn generates most of its income from employers who pay to search its member profiles for prospective employees. Essentially, this is a good idea, but the company’s share price is based on future prospects rather than actual performance.
Granted, to a degree, every company’s valuation takes account of how it might perform in future, but LinkedIn is now valued at a quite preposterous $11.2bn, which means it trades at 170 times next year’s earnings. To put that figure into context, Marks & Spencer trades at 9.8 times future earnings, while Vodafone trades at 10.4; both companies pay dividends in excess of 5pc - LinkedIn doesn’t yet distribute a penny to shareholders.
Furthermore, the company’s costs are going through the roof, currently rising faster than income. Sales and marketing expenses soared by 200pc in 2011 as product development costs rose 100pc. In fact, LinkedIn is so over-valued, it makes Facebook look like a steal (which it definitely is not).
Indeed, having watched how Facebook’s bungled float has made only a handful of folks extremely rich, I won’t be going anywhere near their shares, at least not in the foreseeable future. As for LinkedIn, why its shares trade at around three times that of Facebook’s (the latter at least made a $1bn profit last year) is anyone’s guess. Upon reflection, it might suggest that, as far as ‘social media’ shares are concerned, we’re already in ‘Dotcom Bubble II’ territory.
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