Don't Try To Make Sense Of LinkedIn Share Price

from the it's-a-game dept

The big Silicon Valley IPO today was LinkedIn going public. In many ways, it's a great story, in that LinkedIn isn't an overnight sensation by any means, but really was a company that built up a strong and loyal user base over many years. However, Silicon Valley has been pretty starved of "celebrity" IPOs for quite some time. Of course, in typical Silicon Valley celebrity IPO fashion, the stock shot up much, much higher than its offering price. In the past I've talked about how this is really about a company having left a ton of money on the table (i.e., LinkedIn only got $45 for all of the shares that hit the market, so the stock trades over $100 are between others, and doesn't directly -- immediately -- impact LinkedIn's cash position, though later stock sales can obviously benefit).

I've always found the obsession with the "first day pop" kind of a weird infatuation in Silicon Valley, often done by people who don't recognize what it really means (i.e., that it was priced low). However, there's been a lot of hand-wringing about how LinkedIn's valuation from the super high share price seems ridiculous based on its revenue. And, I agree. It's nearly impossible to match the valuation to the company's actual financial situation. However, this is the nature of the game. Certainly one part of the problem is that some of the buyers and sellers in the market don't really understand what it is they're buying and selling and how to value it. That's just the way things are with the stock market. However, the bigger issue is that people buying and selling the stock are really judging price on two separate factors. The underlying value of the stock is certainly important, but for many people, rather than betting on that, they're betting on everyone else. That is, they're not buying and selling based on a long-term concern for the actual value of LinkedIn, but they're trading short-term by betting on what they think everyone else will value the stock at. In the long-term, that's not sustainable, but it's the simple nature of "the game."

On the last Planet Money podcast, they explored whether or not there's a "gold bubble,", but they actually do a nice job explaining how bubbles form, even though "rational economists" suggest it shouldn't be possible. In the podcast, there's a great story about some experiments, in which students (including business students who should understand this) are given opportunities to buy and sell a single stock with a very clearly defined value... and yet bubbles still form, where people (who can't even explain why) overbid on the price of the stock, even though the real underlying value is known.

To some extent, it's that people don't intrinsically understand statistics and value. Part of it is that people get tied up in "the game." And part of it is just psychology. But the fact is that bubbles form all the time, and trying to rationally value something in a bubble isn't a particularly fruitful game in the short term, because the length and extent of a bubble are nearly impossible to determine (long term is a very different story). So, for everyone fretting about the price to value question on LinkedIn, unless you're looking for a long term investment, at this point, it's a meaningless question. What's happening now is gambling and entertainment masquerading as a serious "investment" issue.


Reader Comments (rss)

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    Anonymous Coward, May 19th, 2011 @ 7:15pm

    LinkedIn was the first social network I actively rejected, and for that it holds a special place in my heart.

     

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    Anonymous Coward, May 19th, 2011 @ 8:06pm

    Pure economics explains a lot, but it makes the assumptions that people are both rational and self interested.

     

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    Anonymous Coward, May 19th, 2011 @ 8:27pm

    They're just spammers.

    So some turkish spammer got my email address and sent me an "invitation" through linkedin. It was *obviously* spam - links to spam sites, and asking me to place orders (according to Google translate.)

    At the bottom of the "invitation" was a "report this email as spam" link. So I click on it, and tell linkedin that this is a spammer, that I don't know them, and that the fact that their "personal message" was a bunch of spam links. I click "send" and assume that the spammer will be dealt with.

    Two weeks later, linkedin send me a "helpful reminder" that I haven't accepted the spammer's invitation, and how *wonderful* it would be if I joined their "service".

    So, not only did they *NOT* get around to kicking the spammer off their network, but they spammed me about it!

    Linkedin are just as bad as the spammers they allow to use their service. I blacklisted them at my mail server.

     

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    dano (profile), May 19th, 2011 @ 8:43pm

    This is the same reason...

    that people on ebay pay more for an item than it would cost to buy it new in a local store. They just get caught up in the excitement of buying something exciting.

     

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      Anonymous Coward, May 19th, 2011 @ 8:46pm

      Re: This is the same reason...

      Also some people are lazy and don't want to go to the store and find it more convenient for an item to be shipped to their house. Same reason why some people have pizza delivered.

       

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      Doug B (profile), May 20th, 2011 @ 5:52am

      Re: This is the same reason...

      At one point in time you could find good deals and bargains on ebay (back when amateur and garage sale type sellers were mixed in with the volume sellers). These days that's rare because ebay has been overrun by the volume sellers. Most times I can find identical items on alternate sites for less than what I'd pay on ebay.

       

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    Anonymous Coward, May 19th, 2011 @ 9:00pm

    "if someone else wants it now, it must be worth something. If I get it before he does, he will want it even more tomorrow."

     

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    Leo Strauss, May 19th, 2011 @ 9:50pm

    Deal Heat

    Part of the LinkedIn hype is the need for VC and other early money to find exits for some long holds now. The traditional boosterism kicks in to help launch other IPOs in the quick stream. That's why LinkedIn's underwriters screwed them by dramatic underpricing ($60-$70 more realistic) - not just for the money left on the table but the create the buzz among the rubes and dumb money.

     

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    Anonymous Coward, May 20th, 2011 @ 1:54am

    Ah yes, the stock market. Where you can make a ton of cash without lifting a finger and producing exactly nothing.

    And then people wonder why western economies are collapsing.

     

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    Darryl, May 20th, 2011 @ 2:18am

    No dont try to understand it !!! its beyond you...

    Yes,,,, "Supply and Demand" is such a difficult concept !

     

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    Anonymous Coward, May 20th, 2011 @ 3:01am

    If LinkedIn had set the stock price at $90, it would have gone up to $200, for exactly the same reason it went up to $100 when it was set at $45. Whether that means they left twice as much money "on the table" as you think they did is arguable.

    As for linkedin itself, I deleted my account there when I heard they were going public.

     

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    Anonymous Coward, May 20th, 2011 @ 3:52am

    LinkedIn are spammers...

    ...as everyone with a sufficient level of expertise in the field knows. I wish them massive financial failure and terminal illness. It's better than they deserve, but I'm feeling charitable this morning.

     

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    Anonymous Coward, May 20th, 2011 @ 5:26am

    a very large part of the reason the stock starts at 45 and skyrockets is because the investment banks invariable undervalue the stock to the company - knowing full well that they can buy up 100k+ shares at the 45 and then turn and resell it when it hits a high. In this case it went as high as 110-120, from what i saw. That's a great profit from a one day investment.

    Essentially, the bankers are screwing their client out of money that could be used for the business.

     

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    John Doe, May 20th, 2011 @ 5:42am

    Stock prices are pure gambling

    Stock prices are based on nothing more than pure gambling. If they were based on a real return like dividends, we would not see the wild fluctuations in the market like we do. Since they are not, prices can bounce up and down on a whim. It makes not sense to spend $70 on a stock that pays a $1.60 per year dividend. All you are doing is betting the next sucker will pay you $75 or $80 for your share.

     

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    Matthew A. Sawtell, May 20th, 2011 @ 6:06am

    That IPO is going to do nothing but drive a lot of customers away...

    Honestly, wish they would have made it a private company, instead of public - because once a large enough group of public investors owns a company, the ability to stay on focus and not lose the original customer base really falters.

    Been using LinkedIn for a while, and it has been a great tool for Mercen... er, White Collar Contractors, to reach out to a more focused pool of clients. Yet, with the ramp up to IPO, I have been noticing a series of changes (i.e. premium tools are available for a certain price, explosion of groups, etc.) that doesn't really appear to be that much different from sites like Monster, CareerBuilder, Dice, and the rest of the 'Meat Shop' Websites that have come and gone over the years.

    I figure my last day with LinkedIn will be when they start charging for contractors and clients to actually communicate via LinkedIn's web services (i.e. internal inbox). {shrug} It is one of the reasons why I pony up for my own website to advertise my resume for the last decade.

     

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      ChrisB (profile), May 20th, 2011 @ 8:48am

      Re: That IPO is going to do nothing but drive a lot of customers away...

      > Yet, with the ramp up to IPO, I have been noticing a series of changes

      I have too. I'm on LinkedIn, but very reluctantly. I will jump ship very quickly if they start messing about. Facebook could crush them if you were allowed to make different Personas on Facebook. If I could make a Work persona that was visible to my Work contacts, that would be great. Right now, it is impossible to "friend" my co-workers, because I don't want them knowing every little thing about me.

       

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    DCL, May 20th, 2011 @ 8:34am

    Stock prices are

    ... the market's perception of what the market's perception is.

    Think about it... people who by and sell stocks are trying to out guess what others think the market will do based on what they think the market will do because of what the others are doing.

    So the don't really mean anything but what some traders think the market will do... which may or may not be aligned with the actual value of what the business is actually doing.

     

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    ChrisB (profile), May 20th, 2011 @ 8:45am

    Bubbles ...

    > but they actually do a nice job explaining how bubbles
    > form, even though "rational economists" suggest it
    > shouldn't be possible.

    The housing bubble is easy to explain. We have a free market for everything except money. The fed set the "price" of money by setting the interest rate. To prop the economy up after the dot com bubble, Greenspan set the interest rate too low, which created too much money. This money eventually found its way into housing, which caused huge price inflation (more money chasing limited resources = inflation).

    This wouldn't be a problem because free markets are self correcting. Idiots are weeded out because they go broke. However, because Bush and Obama bailed out all these bankers and bondholders, they created a huge moral hazard. Why should these companies be careful with their money if their mistakes will be paid for with taxpayer bailouts?

    Bubbles will continue to be created for these two reasons: 1) the Federal Reserve controlling the money supply through interest rates, and 2) the government bailing out firms that make bad decisions. You get rid of both (hell, either), then bubbles are much less likely.

     

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    Lawrence D'Oliveiro, May 20th, 2011 @ 10:41pm

    Physical Model

    The same underlying mathematics applies in lots of cases, e.g. electronic circuits and mechanical devices. I like to think of it in terms of a car’s suspension system as the car goes over bumps in the road. The springs are supposed to provide a corrective force that responds to the bump, but not instantaneously. But that force doesn’t just produce movement, it produces acceleration. So even once the spring has returned to its neutral point, the inertia of the car body keeps it moving past that point, whereupon the spring pulls it back the other way, and so the whole thing oscillates back and forth.

    To stop this happening, you need shock absorbers—something that bleeds off the energy from the system. The economic analogue to this is a regulatory authority, whose job is it to make the market less efficient in its response to external stimuli. This damps down the instabilities and puts a stop to boom-bust cycles, something that unregulated markets are never able to manage on their own.

     

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