It is Wall Street’s job to throw money at new companies, a Wall Street economist explained to me during the dotcom boom of a decade ago, when the valuations of IPOs were being questioned. We can report today that the Street, despite the dotcom bust and the real estate bust and the financial meltdown, has not only retained its moneychucking prowess but amped it, if LinkedIn is any measure. The social network for the professional set had already marked up its IPO to $45, the top end of the range, before it opened for trading today. The stock rocketed about 125% before your second cup of coffee as investors once again rushed the doors to try to buy what may or may not be the next great internet company.
It’s tempting to lump LinkedIn with those featured dotbombs of an era ago, Pets.com being the most famous. But remember, most of those outfits were profitless promises of future growth. LinkedIn has a solid track record. Sales have doubled every year. It has 100 million registered members. And good golly, it actually earned money in a couple of quarters. But that means the company trades at a p/e north of crazy, upwards of 1,000. Google’s p/e, by comparison, is closer to 21.
Some things did remain the same. LinkedIn CEO Jeff Weiner, who became a dotcom jillionaire, said the requisite, “I don’t care about the stock price” the way a basketball player talks about “it was a team effort” after he scores 50 points. C’mon, Jeff, how about a little whoopee, or even, “Are those people nuts or what?”
That’s the question, of course: just how much are the social networking companies that are due to hit the market, including Groupon, ultimately worth? Are we headed for Dotcom II? In important ways the world is different now. A decade ago, everyone was still trying to figure out where this new technology called the Internet would take us. Although it was clear that a huge disintermediation was taking place, particularly in retailing, the speed of consumer adaptation was relatively slow. We were wary, for instance, of making credit card purchases. Nobody had a smart phone. Amazon struggled mightily. Pets.com and Webvan—an early internet grocery delivery firm—flamed out. Today, of course, there are plenty of grocery and pet sites operating.
Social networking sites didn’t have to wait for Internet penetration to reach a critical mass. We all have smart phones. So investors don’t have to guess as much as to whether these firms will catch on and thrive. Key metrics— registered users and page views—can be known by the minute. So investors have a much deeper knowledge about web companies today. It’s arguably more rational that they would want to get a piece of the action. What never changes is the herd mentality. Whether that’s in hula hoops or real estate or planking or social network stocks, everyone wants to be in on the hot item. That’s why we end up throwing too much money at some many things, just like Wall Street always does.