Anthony J. Pennings, PhD

WRITINGS ON DIGITAL ECONOMICS, ENERGY STRATEGIES, AND GLOBAL COMMUNICATIONS

LinkedIn Social Media IPO Raises Questions of a Global Internet Bubble

Posted on | May 26, 2011 | No Comments

Linkedin and the recent slew of Chinese Internet IPOs have both revitalized the IPO market and raised concerns about a new “dot-com” bubble. This time, though, it’s global. LinkedIn, the social media site for professionals was priced at $45 last Wednesday May 18, 2011 and closed Friday at over a $100 a share. The social media company was originally planning to offer 7.8 million shares at $32 to $35 giving the company a valuation of over $3 billion but the equity markets thought differently and collectively valued the company at $80. Is a company with last years earnings of $15.4 million worth some $8-9 billion? What does it mean for upcoming planned IPOs such as auto and mortgage lender Ally, embedded semiconductor device maker Freescale, coupon coordinator Groupon, material science innovator Momentive, and retail brand ToysRus? Not to mention media darlings Facebook and Twitter? Are we headed for another Internet bubble with its inevitable crash?

Here are 5 factors driving social media stocks:

First. The good news is that the benefits of social media and e-commerce are proving significant and real – largely due to their global reach, rich multimedia, cloud storage capabilities and viral strategies that utilize network effects to reach huge numbers of people quickly and cheaply. The Internet’s new mobility has gone beyond laptops to netbooks, smartphones and tablets such as the Apple iPad and Blackberry Playbook and have meant much more activity on the net and many more clicks for content providers and eyeballs for advertisers.

Second. Social media continues and accelerates the Internet’s globalization imperative. Although censorship exists and countries can and often block aspects of the Internet such as Facebook and Twitter, the web has continued to become an important part of the daily lives of people from countries around the world. As the above video mentioned, Linkedin has over 56 million of its 100+ million users from outside the US. Cities like Abuja, Cairo, Bangkok, Jakarta, and Rio de Janeiro have some of the most prolific social media user populations.

Third. We continue to see an economic recovery in the US since the financial crises of 2007-2009 and even faster growth in the BRIC countries. Lower interest rates have been a factor due to the to the US Federal Reserve’s “petal to the metal” financial intervention and mediocre fiscal stimulation by the government have placed the US on a firmer though still shaky economic foundation. Meanwhile growth around the world has proceeded on a faster pace despite rising commodity prices.

Fourth. Global exchanges and investment banks are hungry to list the new social media companies and for the trading activity they can bring in, especially with peaking asset prices. The lower interest rates have meant that cheap money has been scooped up by big speculators who have been able to borrow a lot of money due to liberal margin requirements to ride a number of other appreciating assets, including the stocks of the DJIA that has gone from a low of 6,470 on March 6, 2009 up to the current trading range around 12,300. Traders have also sent gold to over $1450 and oil to $100 a barrel for an unprecedented period of time. With these assets reaching significant valuation heights, investors are starting to look elsewhere. Why not social media?

Fifth. Another factor is the role of the so-called secondary markets that facilitate the exchange of shares in privately held companies. Much of the action is taking place in online exchanges where companies like Facebook or Zynga are not required to disclose financial information. One of these private exchanges, Secondmarket.com/ reported more than $100 million in private stock transactions during the first few months of 2011, primarily in shares of social media companies like Facebook and LinkedIn. These secondary markets have gone online to provide an environment for buying and selling previously illiquid assets like unregistered stocks and warrants, commercial loans, and a variety of corporate and residential mortgage-backed securities. Employees of these unlisted companies, for example, are often tempted to cash in their shares. Social media stocks of pre-IPO companies have proved to some of the most popular as companies delay listing on major exchanges because the threshold for listing is so high. Add the fact that the hype on these stocks has gone viral and the actual amounts available are low, the high demand for limited supply is forcing prices to rise.

Anthony

Anthony J. Pennings, PhD has been on the NYU faculty since 2001 teaching digital media, information systems management, and global communications. © ALL RIGHTS RESERVED

Category: digital geography, global communications, global e-commerce, political economy of media
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    Professor at State University of New York (SUNY) Korea since 2016. Moved to Austin, Texas in August 2012 to join the Digital Media Management program at St. Edwards University. Spent the previous decade on the faculty at New York University teaching and researching information systems, digital economics, and strategic communications.

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