Share prices during the IPO of online social network LinkedIn’s stock soared into the stratosphere this week, reports the Wall Street Journal. This has set many Wall Street brokers on edge as concerns over a new tech bubble surface. The prices are so high that brokers are advising investors to short LinkedIn stock, as a massive decline is anticipated.
LinkedIn numbers reminiscent of late-1990s dot com bubble
Reports indicate that LinkedIn’s stock ramped up 109 percent Thursday and completed the first day of trading at $94.25 per share, reflecting a $9 billion market capitalization that was 592 times above actual earnings. The price continued to rise Friday.
“Even if you think (LinkedIn is) a great business model, the feeling is that the valuation is way beyond what even the most bullish guys were hoping for,” said youDevise Ltd. Short-term trading analyst Timothy Murphy.
How a LinkedIn short sell works
In order to short sell LinkedIn stock, investors “borrow” the stock, then sell it in a bet that the share price will fall and that they can then buy shares back and return them to the lender. A fee in the form of an annualized percentage of the stock’s value is what investors pay for borrowing.
Ultimately, the only way investors will profit from short sales of LinkedIn stock is if the value drops severely. According to head of equities and derivatives Jonathan Bensimon of Société Générale in New York, betting on the fall of LinkedIn is a pretty big gamble.
“It’s going to be a tough game and a dangerous game,” Bensimon said to the WSJ. “Even if someone thinks it is valued way too high, he should think twice before shorting the stock.”
This is not your father’s dot-com bust
Over each of the past 12 months, LinkedIn has made about 7 cents per share, reports the Washington Post. Yet this week’s IPO explosion was an entirely different animal. The Economist notes that related social media and tech companies like Facebook and Twitter were estimated to be worth $76 billion and $7.7 billion pre-IPO, respectively. Groupon, Zynga and Rovio aren’t far behind.
Should the bubble burst
Valuing companies at more than what time-tested giants like Boeing and Ford are currently worth without proven, long-term business plans in place is reminiscent of a dot com bubble, but the difference now, according to The Economist, is that there’s a global dimension to the latest tech company awakening that the late-1990s bubble did not possess.
Many of the companies in question originated outside the U.S., such as Skype (Estonia) and “Angry Birds” creator Rovio (Finland). As a result, some experts believe the new tech bubble is more secure in its diversity. But if the bubble does pop, the spillover effect that dragged down the entire stock market in the late-1990s dot com bust won’t be there this time.