Bubbles


Location Date: 
May 19, 2011
Content: 

Boy am I glad we started our blog a few days ago – social media is just exploding in value.  Linkedin came public today at $45 a share for a valuation of about $4.5 billion or so.  The stock, in short order, is trading over $100 so make it $9 billion and change now.  So – do we have another bubble run coming for social media companies?  I am not sure – LNKD generated over $250 million of revenue last year, so it is not a flash in the pan and this year it’s expected to generate over $400 million – pretty good growth!  Of course earnings and cash flow are the real drivers of value and they may be a few years away still.   Henry Blodgett (remember that guy from the 90’s internet bubble craze) is out with some thoughtful points on the situation (http://www.businessinsider.com/sorry-linkedins-ipo-is-not-proof-of-a-new-tech-bubble-2011-5 ).  His view is that the estimates analysts are putting on the company’s future projections are absurdly low – he thinks they could cash flow $400 million in 2013 and have EPS of $1.50.  If that is true, then relative to a company like Open Table (OPEN) trading at 90x 2011 expected EPS currently, it is actually not “absurdly” overvalued.  They do also seem to have a lock on their niche space of the go-to site for corporate hiring (especially head hunters and corporations).  For sure, our value-oriented managers will not be touching this stock – from either the long or the short side!  Shorting this name could be dangerous to your financial health.  At this price, some analysts have suggested they could make “tuck-in” deals for companies like Success Factors (SFSF) or Taleo (TLEO) who sport market caps of $2 and $1 billion respectively.  My own view is that this stock is overvalued – why?  Because they decided to issue only 7.84 million shares into a very hot social market ($352 million of market cap at the time of issue) – a game Jim Cramer calls the “sliver” game.  Keep it tight and controlled and let the animal spirits run wild!  It does not mean the party cannot continue – it most likely will. One thing you can count on is that there will be a lot more social media names coming to market!

Jim McGovern