By JACK HOUGH
LinkedIn shares doubled in price early Thursday after making their public debut, giving the company a value of more than $8 billion. How expensive is that for such a stock? By my math, even at the subscription price of $45 a share, with a corresponding market value of $4.3 billion, LinkedIn was the costliest stock in America relative to the money it makes. More on that in a moment.
The company says it adds a new member each second. More than half of users are from outside the U.S.
Some of the typical methods of valuing a company aren't much use here. LinkedIn's profits are tiny for now, and in ratios like price-to-earnings, tiny denominators give nonsensical results. Over the past four quarters, the company has earned $15.6 million, up from a negligible profit a year earlier. Assuming a $4.3 billion market value, the P-E ratio is about 275, versus a market average of around 15. Again, that's the wrong number to use, and earnings for young companies often rise rapidly from such a small base. Asset value is similarly unhelpful. As an Internet business, LinkedIn uses relatively scant assets to make money, so its price-to-book ratio is close to 100, versus less than 2 for the typical U.S. stock.
The price-to-sales ratio is more telling. LinkedIn booked $292 million in sales over the past four quarters, up from $142 million a year earlier. That gives it a P-S ratio of 14.7.
I recently hunted for a higher P-S ratio among the large, midsize and small companies that form the S&P Composite 1500 Index. I eliminated companies with less than $100 million in yearly sales (again because small denominators skew ratios). That left 1,476 companies. I then eliminated banks, investment trusts and other companies that don't produce sales in the classic sense, leaving 1,227 companies. Among these, just one company has a P-S ratio above LinkedIn's pending 14.7. Much higher, in fact. It's Vertex Pharmaceuticals (VRTX),
If Vertex is a statistical freak -- an anomaly to be dropped from the results -- then LinkedIn is now America's most expensive stock. Even beloved names aren't close. Cloud computing wunderkind Salesforce.com (CRM)
Obviously, investors are anticipating breathless growth for LinkedIn. Its sales doubled over the past year, after all. But other companies valued at close to $4 billion include Panera Bread (PNRA),
For Thursday's trading, excitement matters more than math. But there are three reasons for long-term investors to be cautious, not including the lofty valuation. First, most IPOs underperform in their first year of trading, long-term studies show. Second, and perhaps a related point, an IPO means current owners of the company feel it's a good time to unload part of their stake. Among reasons to sell something, the belief that its value is about to rocket higher is usually not chief among them.
Third, like family-controlled media companies, LinkedIn will have a dual share structure. Class B shares are for longtime owners. Class A shares are for newcomers. Guess which ones control voting? Shareholders are supposed to be owners. Those who buy LinkedIn shares Thursday and hold them long-term will get economic exposure to the company's decisions but will have little ability to influence them.