LinkedIn Goes Public: Reviewing the Valuation

Today, I was getting set to post the links I liked over the past week when I got into an email conversation with The Money Writers, the blogging network that I am proud to be associated with. The conversation went in several directions. One of those directions was the view of Brip Blap on the LinkedIn valuation.

In Silicon Valley, one of the biggest news items is the LinkedIn IPO. It was the biggest IPO since Google in 2004. I have to pause a bit and think about that. In the last 7 years (roughly) the biggest IPO in America is LinkedIn? That’s can’t be right, can it? Around the years 1996-2000 so many companies had IPOs that the craze was, “How do I get in on those IPO companies?” Am I the only person who Rip Van Winkle’d 7 years?

Anyway, back to LinkedIn’s valuation and the conversation with Brip Blap.

In that conversation, Steve made a point about the large market capitalization of LinkedIn – 8.7 billion. I put bolded “large”, because was a key point that he mentioned. I immediately questioned this because… well, in 1999 I was part of a technology company that had an IPO that was above of 4 billion dollars. In my mind, 8.7 billion is chump change for “the biggest IPO in about 7 years.” (Again, this reflects how little I follow the IPO markets.)

I did a quick Internet search and found a site that suggested that mid-cap stocks have a market capitalization between 2 and 10 billion dollars. So I asked Steve again, “What makes LinkedIn a large company?” He pointed to a great article on Mashable: LinkedIn Is Now Worth More Than These 13 Household Names. I want to give credit to Steve. He knows his stuff and showed it. I’m not one to argue with a great site like Mashable – they are usually dead-on. However, I had to look it up to reconcile the differences.

I recommend that you open up the Mashable article in another window or tab to follow along. (When we were discussing LinkedIn, it’s capitalization was at 8.7 billion a drop from when the Mashable was published. However, LinkedIn got a boost in last the couple of hours of trading and closed at over $95 – a market capitalization of over 9 billion dollars.)

Mashable made a point that LinkedIn is “Worth More Than These 13 Household Names.” Here is an extremely snarky look at some of those 13 household names:

• JCPenney – This company is still in business? If it weren’t for them buying links and getting smacked down by Google, I wouldn’t have heard of them in the last 5 years… maybe longer. JCPenney is like Sears, thought at least I know where those are… and Craftsman products differentiate them. For those New Englanders out there, I’m tempted to make a comparison of JCPenney to Jordan Marsh or Filene’s.
• MolsonCoors – I should invest right away. I think it is a better deal than LinkedIn. This conglomerate has many brands that are stronger than the average person thinks. However, their growth is going to be limited like any consumable that has been around for years.
• United Continental Holdings (World’s largest airline) – Oooh, an airline. Let me jump on investing in airlines because they are fantastically profitable. (Is that snarky enough?)
• Tiffany & Co. – In this economy? Really? I might as well invest in gold-plated buggy whips. It’s not surprising that it might not be doing well.
• Red Hat – This is an awesome household name. I had a conversation with my mother the other day, I said, “Mom, I’m worried that you don’t have enough red hats in your home.” I’m sure that most families have had the same conversations in their households about Red Hat. Here’s an additional thought: They give their product away for free (though they charge for support).
• Sirius XM – Weren’t both Sirius and XM essentially penny stocks a couple of years ago? I used Google Finance to put graph a 100 day moving average and it was below $2 in most of 2004. It hit a peak around 2006 around $6 and then steadily dropped off to around the $2 range it is now. I realize the merger of the two companies was contested, but it seems like the view from regulator was, “Awww, we should let this go… the business proposition was horrible, and they can only exist if they merge. So let’s throw them a bone and give them a chance. If nothing else they’ll look cute together.”

  In other, related news, is Howard Stern still alive and broadcasting? I haven’t heard his name mentioned in so long that I had Google, “Shock Jock” to get his name. Perhaps he’s broadcasting from a J.C. Penney?

There are a couple of other legit companies on the Mashable list that I’d invest in. Tops on that list is Electronic Arts. They have some great technology in sports video games and their exclusive contracts are hard to ignore.

There are other companies on the Mashable list of “household names” that I would not invest in. A great example is CarMax. I’m going to invoke the Red Hat rule, “Ask your mom about the business and what it does before calling it a ‘household name’.” This is especially true in an article of household names like this one. I have no clue what CarMax is. I had to look them up. I thought the top two online car websites were CarsDirect.com and Cars.com. Then I thought I thought that they were related to CarFax… a company that I’ve seen advertised a lot.

I think the bottom line here is that investing in individual companies is subjective. This is why we analyze companies before we invest in them. Consider this one person’s opinion companies around the market capitalization of LinkedIn. At best it is one data point, make your own decisions from there.