Amid the anger this week of Facebook investors, the embarrassment of the company's underwriters and the schadenfreude of its detractors, a question has been bugging me: If so many investors are skeptical of Facebook's (FB) overvalued IPO, then why are they still so positive on LinkedIn (LNKD)?
Like Facebook, LinkedIn is a social-media pioneer that has built up a steadily growing and profitable business. Both have achieved what few social networks have by creating a community of people who regularly interact with each other. Both exploit the personal data of their users to make money. Both entered the stock market as proxies for one of the hottest new areas in technology.
And both went public in mid-May: Facebook in 2012, while concerns about Greece and the EU were weighting down broader markets; and LinkedIn in 2011, when concerns about Greece and the EU were weighting down broader markets. But Facebook is trading around 16% below its offering price, while LinkedIn has gained 130% from its offering price.
Of course, LinkedIn also sagged after its initial debut. After more than doubling on its first day to $122.70, the stock had drifted down as far as $60.14 a month later. Earlier this month, LinkedIn had rallied back to $120.63. On the one hand, that may give hope to Facebook investors for a similar rebound over the next year. On the other, it may not. Investors in Facebook warrants are buying twice as many puts as calls, with many betting the stock will be below $22 a share by December.
Such bearishness is understandable, given that Facebook's offering price of $38 a share valued the company at 26 times revenue and more than 100 times profits (it's now down to 21 times revenue and 74 times earnings). But LinkedIn is trading at 17 times its revenue and about 700 times its recent earnings. And while Facebook's stock has dropped 24% from its initial trading price last Friday, LinkedIn is down only 1% over the same period.
Much of Facebook's slide is due to the ham-fisted bumbling of its IPO – notifying favored investors of weaker growth forecasts from the company and face-saving securities analysts, then announcing more shares for sale by insiders while lifting the offering price. Just how Wall Street managed to slap a sell rating on Facebook shares before the IPO is a tale yet to be told.
Last Friday, LinkedIn's stock didn't move much for the first couple of hours. But once it became clear that Facebook's newly listed shares were faltering, LinkedIn began to fall, closing the day down 6% while Facebook closed largely unchanged from its offering price. Other web stocks also fell on the Facebook effect: Zynga (ZNGA) was down 14%, Groupon (GRPN) and Pandora (P) were both down 7%. And as of Thursday's close, LinkedIn is down about 1% since Facebook started trading, as are Pandora and Groupon.
That may suggest that investor disenchantment in Facebook hasn't spread to other recent web IPOs -- except Zynga, since its revenue relies heavily on Facebook's fortunes. But it doesn't explain why investors would return to LinkedIn, when its PE is so much higher than that of Facebook's.
The reason may be that investors are looking at other metrics, ones that suggest more future growth than Facebook was promising even before its (unofficially) lower guidance. In the quarter ended March 21, Facebook's revenue rose 45% to $1.06 billion. LinkedIn's grew more than twice as fast: 101% to $188 million.