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Tech Bubble 2.0? Not So Fast.

The wildly successful Linkedin IPO has almost instantaneously made Reid Hoffman, the co-founder of Linkedin, a paper billionaire – twice over.  No less dramatically, it has provided pundit wind bags with a fresh breath of hot air to blow across the sphere of media.

The lofty valuation of LinkiedIn has led some in the industry to compare the company with the likes of memorable dot com era failures that have become synonymous with the tech bubble of the late nineties and early years of the new millennium. 

Some names may still raise hairs on the backs of investors that took huge losses, becoming victims of over-inflated growth expectations. Webvan.com, which was valued at $6 billion after its IPO in 1999 - collapsed about a year and a half later. Pets.com raised $82.5 million in its IPO during 2000, and was insolvent within nine months.  Even Netscape, which had their IPO surrounded by great expectations, never lived up to the hype and was eventually phased out of use.

These prodigious collapses provide ideal case studies to examine market conditions at the time of the tech bubble, but supply few valid comparisons with LinkedIn or the current state of the technology sector.

In 1999 and 2000, at the peak of the tech stock hysteria, a company that had yet to turn a profit or in some instances even generate any amount of positive revenue, was able to hold a well subscribed initial public offering, as investors were all too eager to buy into a promising upstart - providing a company with considerable amounts of cash and resources.

Ultimately, these upstart prospects quickly became fledgling suspects, forced to file for bankruptcies as they were unable to generate meaningful revenue streams to finance operations.

Linkedin is Different

LinkedIn saw revenue of $243.1 million in 2010, and net income of $15.4 million. The social network had a 110% increase in revenue growth in the first quarter of 2011 (yoy).  Additionally, they've got 100 million registered users and three separate sources of revenue: hiring solutions, advertisements, and premium subscriptions. 

Whether these fundamentals warrant a $9 billion valuation is debatable. However, implying that a lofty valuation for this particular tech company reflects a more broad tech-market bubble - is in my opinion unjustified and moreover misrepresents the fundamental investing flaws that played a key role in the inflation of the tech-bubble.

In the two year time-span between 1999 and 2000, more than 800 tech companies were priced. Compare that with only 45 tech company offerings in 2010. The current pace in 2011 indicates offerings will likely exceed that of the prior year, but fall tremendously short of the dot com era rate.  This lends credence to the argument that today we find ourselves in a completely different market environment than that of 2000.

This isn't the First Time Market Commentators have Cried Wolf

Google's 2004 IPO valued the company at $23 billion, a number that pundits were quick to note made the search giant larger in terms of market value than General Motors - a name  synonymous with American industry.  It was derided as the re-emergence of over inflated growth expectations – 'Tech-Bubble 2.0'.

Google stock turned out to be a great investment. Though this success is hardly prophetical of how well LinkedIn buyers will fair – it is a testament to the general inability of forecasters to assign accurate valuations.

One blindingly obvious take away from this IPO is that market participants clearly want a piece of LinkedIn. Does that mean you should buy too? At it's current valuation, it's certainly not a low risk stock and may not be ideal for investors with smaller risk thresholds. 

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