Dan Whalen is a JD candidate at Osgoode Hall Law School.
Stock in LinkedIn, the social networking website for professionals, went public recently, inspiring many to speculate about a coming wave of social networking IPOs. Concerns have been raised in all quarters about the website’s lofty valuation, but a quiet few have also wondered what impact the market debut may have on user privacy.
Shareholders and non-shareholders alike are keen to see how LinkedIn fares in the open market. Experts agree that the stock’s reception will bear on whether other social networking websites – such as Facebook, Twitter, Groupon and Zynga – follow suit and go public in the coming months and years. “LinkedIn’s IPO is a litmus test for the other social networking platform companies,” says Bill Buhr, IPO strategist for investment research firm Morningstar Inc. All of the above sites, save Twitter, have discussed going public, with Facebook expected to make its debut in 2012. Buhr speculates that, if LinkedIn proves successful, such schedules could accelerate.
Sold at an IPO of US$45 per share, LinkedIn stock nearly doubled overnight to its current trading price at just under US$90, raising the company’s market capitalization to over US$8-billion. Many investors are justifiably cautious about this valuation. “For the most recent year, revenue was [US]$243 million and profit was [US]$3.4 million,” points out Michael Carnegie, an industry professor at the DeGroote School of Business at McMaster University. Carnegie wonders: “[W]here’s the value?”
Eyebrows are further raised when one considers that LinkedIn shares began trading at approximately 17-times sales and 260-times earnings. As these multiples skyrocket with stock inflation, they become increasingly out of sync with other high-tech powerhouses, like Google trading at six-times sales and 21-times earnings and Apple at 16-times earnings. Success of what thus might seem like an unnecessary investment risk also speaks to the confidence (or hope) that investors have in the future of social networking.
Of further concern to social networkers, IP enthusiasts and privacy watchdogs is how the public debut of LinkedIn might affect members’ privacy. To date, the website has done a fairly good job at protecting its users from data miners. LinkedIn allows third parties to access user data, but limits what sort they can extract and what users of those third-party applications can view. LinkedIn also affords its members exceptionally clear control over what data can be viewed by users outside of their professional connections on the website.
However, as at least one onlooker speculates, what remains to be seen – beyond LinkedIn’s stabilized valuation – is how the website will respond to the demands that public companies face in demonstrating growth and profitability every quarter. The siren call of revenues from targeted advertisements and sales of enriched user data will surely be tempting if the website fails to meet analyst predictions, as stocks are wont to do from time to time.
All of these concerns apply just as well to the other social networking websites that ultimately decide to go public. In the months and years to come, LinkedIn will signal to social networking investors what valuation is sustainable and to users what level of privacy they can expect.