4:56 PM
By Alina Selyukh and Clare Baldwin
NEW YORK | Wed May 18, 2011 6:06pm EDT
NEW YORK (Reuters) - LinkedIn sold $352.8 million worth of shares to the public on Wednesday and the intense demand for the stock could be a sign of just how important "social networking" is becoming.
LinkedIn is the first U.S. social networking company to become public, with a handful of others expected to follow suit, including Facebook, Groupon, Twitter and Zynga.
While the companies have significantly different business models, they each tap social networks and the valuations for each are skyrocketing.
"Social networking is the most efficient customer acquisition strategy in the world," said Saad Khan, a partner at venture capital firm CMEA Capital.
"(It) is going to be a customer acquisition strategy in every industry," he said, explaining that social networks can help companies reach new customers more efficiently.
LinkedIn, which allows people to create professional profiles and is widely used as a job-hunting tool, raised the expected price range of its IPO by 30 percent on Tuesday, to $42 to $45 per share. At the $45 IPO price the company has a market value of $4.25 billion. Its shares are expected to begin trading on the New York Stock Exchange on Thursday under the symbol "LNKD."
Facebook, a social networking side geared more toward recreational use, has experienced even bigger increases in its valuation.
When Goldman Sachs arranged a private share sale in January, the company's implied valuation was $50 billion. Now, just months later, it is valued at roughly $70 billion, based on recent private share sales in the secondary markets.
The company is widely expected to go public in April 2012.
"There is a feeding frenzy is going on," said Ben Howe, Chief Executive Officer of boutique investment bank America's Growth Capital.
"There are companies that are going to have very strong positions in massive markets such as Facebook ... but I think most of the other companies that are riding on their coattails and getting these enormous valuations do not fit the same profile and are just extremely overvalued," Howe said.
Groupon, which brings people together for deals, has had talks with bankers about an IPO that could value it at $15 billion to $20 billion.
Yet, even with all of the hype, there has not really been a test of how hungry public investors are for these stocks. LinkedIn will be that test.
THE RISKS
One of LinkedIn's biggest risks may be its gutsy bet on its future growth -- combined with an admission that it does not expect to be profitable in 2011 on a U.S. generally accepted accounting principles (GAAP) basis.
"Frankly, they're a little bit arrogant saying, 'We're going to have a great IPO, but we're also going to lose money this year,'" said Francis Gaskins, IPOdesktop.com president.
After two years of losses, LinkedIn finally made money for its common stockholders in 2010 -- but then it was back to only breaking even in the first quarter of 2011.
In the risk factors section of its prospectus, LinkedIn said the rest of the year could be the same, or worse:
"Our philosophy is to continue to invest for future growth, and as a result we do not expect to be profitable on a GAAP basis in 2011," the company said.
LinkedIn added that it expects its revenue growth rate to decline over time and its costs to increase.
The risk factors section of any prospectus is designed to encapsulate worst-case scenarios.
But many investors would not likely be pleased with a profitable company flatlining or swinging to a loss in its first year as a publicly traded stock.
Earlier this week, the chief executive of LinkedIn's French rival Viadeo told Reuters his venture would delay its IPO, in part because of concerns of having to answer to shareholders about profitability.
INTERNET STOCK?
Another peculiar fact about LinkedIn is that it's not quite the Internet company most consider it to be.
Most of the biggest social networking sites mainly make their money through online advertising or Internet services.
LinkedIn is an online platform but actually makes more money through so-called "field sales," or a sales force
directly soliciting customers, agencies and resellers.
In 2010, 56 percent of LinkedIn's net revenue came from field sales. By way of comparison, only 44 percent of LinkedIn's net revenue came from online sales.
"(Feet on the street) is an expensive sales force," IPOdesktop.com's Gaskins said. He added that almost half of LinkedIn's business comes from selling "hiring solutions," which help match companies and job-seekers, a space where LinkedIn could face tough competition from niche job-seeking sites and traditional recruiting firms.
(Reporting by Alina Selyukh and Clare Baldwin; editing by Dhara Ranasinghe and Andre Grenon)
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