Anyone who uses social networking websites (who doesn’t?) has probably internalized the media buzz of how companies like Facebook, Twitter and LinkedIn are allegedly changing the way we interact and do business. If you are in this camp, then you probably heard the news about LinkedIn going public in an initial public offering (IPO) of shares late last week.
As the first mainstream social networking site to float on a stock market, excluding China’s already public RenRen social [surveillance] networking site, LinkedIn’s (NYSE: LNKD) IPO was the only show in town last week. The share rocketed from an opening price of US$45 on the New York Stock Exchange to a high of over $122 on opening day before settling in for the night at around $94.25. It closed out last week at $93.09, more than doubling its offer price, and valuing the company at something around $8.5 billion, give or take a few hundred million.
Many people who got in on the LinkedIn IPO think they just won the lottery. Many who missed the boat are suffering from acute envy and the powerful and insidious feeling that they have lost out while everyone and his grandma was apparently banking a packet.
Many of these same people are probably preparing themselves to get in on the action when other social networking sites go public this year or next. Most eagerly anticipated is of course Facebook, the real heavy weight of social networking, already ‘valued’ by Goldman Sachs at something like $50 billion, and slated to go public 2012.
So what the hell is going on here? And why do I feel like I’ve heard this all before?
Let’s look at some numbers.
LinkedIn’s 2010 revenue was $243 million with a puny profit of $15.4 million, which means that LinkedIn is currently valued at 35 times its revenue and an eye watering 552 times its profit. To put this in perspective, Google, the most powerful internet company, is valued at only six times revenue. Yet a company that actually produces something people need, like say Scottish and Southern Energy (LSE: SSE), which generates and supplies power to people’s houses, had revenue in 2010 of £21.5 billion, a profit of £2.111 billion and a market value of only £12.5 billion. Put another way, ‘the market’ values Scottish and Southern at a mere 1/60th of the ratio of value to revenue it has bestowed upon LinkedIn. Yet Scottish and Southern actually produces something and pays investors a hefty dividend while LinkedIn keeps its lights on through the promise and peril of the internet advertising Ponzi scheme.
But surely, I hear the pundits pounding their keyboards, LinkedIn is part of a new economic era of virtual living and blue sky thinking. It’s a growth story with no upper limit. Scalable beyond scale. And ‘leveraging’ networks to produce, err, what exactly? A trickle of money from people willing to pay a few dollars to be introduced to someone they were too drunk to talk to at a tradeshow, to gratify their egos by finding out who is viewing their profile or to stalk an ex-colleague? Indispensible, no doubt about it. Worth $8.5 billion? Without question.
Clearly people like me just don’t ‘get’ the new world economy and are living in the past.
And think of Facebook! With 600 million users worldwide surely it will float for $50 and by the end of the day be worth $100 or $150 or $200 billion and be heralded as the most important stock of the 21st century. Clearly if you aren’t ‘in’ then you are definitely going to be ‘out’.
But wait. We’ve all been here before. In 1999 we partied around the dotcom punch bowl with its 3 am promises of ‘new paradigms’ and instant millionaires, and then the party crashed into a decade long $5 trillion dollar hangover. One that only ended when Mark Zuckerberg found the keys to the social networking liquor cabinet and kick-started the party again under the banner of ‘Web 2.0’.
As I’ve said before, the most fatal words in investing are ‘it’s different this time.’ Anyone uttering them with sincerity is wandering through a fantasy world high on the opiate of easy money. Anyone parroting them is either a speculator about to lose his shirt and trousers, a broker, a mutual fund manager or someone who works for the great vampire squid.
So let the good times roll. Until they don’t any more. Let’s party like it’s 1999 all over again and when the hangover comes, I’m sure it will be different this time.
Either that or realize it isn’t different this time and buy Scottish and Southern and other companies that actually produce something that people have to have. Companies that make a profit and that pay you to own them through a hefty dividend. And leave LinkedIn and Facebook for posting photos of your Friday night at the pub and for the Greater Fools.
In the meantime, while we wait for more social networks to go public, I’ll continue to use the financially anemic LinkedIn and Facebook and money black hole Twitter to promote this blog without shame and without paying a penny. As for the energy needed to run my laptop? Well, that unavoidable Scottish and Southern bill will be due for payment shortly.
In the spirit of full disclosure, I own shares in Scottish and Southern.