The IPO of social-network LinkedIn will be priced Thursday. And when the shares start trading, a chorus of pundits will point to the stock price and howl that it is proof that we’re in the middle of a new tech bubble.
LinkedIn’s stock may well trade at a high multiple, and, like other high-multiple stocks, it will certainly carry a lot of risk. But there’s a big difference between a high-multiple growth stock with downside risk and a “bubble.”
LinkedIn is an established company. It generated nearly $250 million of revenue last year, and it should do more than $400 million this year. It has three strong revenue streams: consumer premium subscriptions, corporate recruiting subscriptions, and advertising. It earns money. And it has a huge growth opportunity. These reasons and others are why many institutional investors are lining up to buy the stock.
If LinkedIn’s stock is priced in the current projected range–$42-$45 a share–the company will have a valuation of just north of $4 billion. That’s about 10-times this year’s projected revenue.
Is 10-times revenue a high multiple? Sure it’s a high multiple. But it’s also a multiple that, depending on LinkedIn’s growth over the next couple of years, could be well-deserved.
Obviously conservative investors shouldn’t buy LinkedIn’s stock, just as they shouldn’t buy any high-risk stocks. But screaming “bubble!” just because the Internet boom has produced another company that is worth a lot is ludicrous. It will be a “bubble” again when dozens of crappy companies with no businesses are going public at monstrous valuations –the way they did back at the end of the 1990s.