Wednesday, June 8, 2011

The Groupon & LinkedIn IPOs - Broader Significance

On March 1 I wrote a post titled "The Stock Market Bubble - Various Aspects."

In that post I highlighted a variety of factors that support my conclusion that the entire stock market is experiencing a bubble.

One of the factors listed was "Extremely rapid valuation increases seen in a variety of private (tech) companies to high valuations, despite any clear indication that fundamentals have changed proportionately."

Since the writing of that post, we have had one very notable IPO, LinkedIn, as well as another pending IPO, Groupon, that serve to illustrate that point.  What is notable in many of the private tech companies' valuations includes the current size of the valuations; the size of the valuation increases; and the rates at which the valuations are increasing.  All three of these aspects are (very much) outsized.

LinkedIn's first day of trading, May 19, likely reminded some of the type of manic price action seen during tech IPOs of the late '90s.  Here is the chart from May 19 in 1-minute increments:

(click on chart to enlarge image)(chart courtesy of

As seen in Barron's, May 23, in an article titled "Is LinkedIn Already Tapped Out?" at a price of $93 the Market Capitalization was $8.7 Billion and 2010 Revenue was $243 million, with 2010 Profits of $15 million.  As seen in the article, "Twenty-seven months ago, LinkedIn was issuing options with an exercise price of just $2.32 - less than 1/40th of what investors paid last week."

The Groupon jump in valuation is starkly illustrated by the following, as seen in a Wall Street Journal June 3 article titled "Groupon to Gauge Limits of IPO Mania." From that article: "As of March 31, Groupon's shares traded among institutional investors in private secondary trading at an implied valuation of $5.6 billion, according to Nyppex LLC, an intermediary in the secondary market."

While Groupon has yet to go public, various sources have been predicting a resulting post-IPO Market Capitalization in the $20-$30 Billion range.  One revenue projection indicated 2011 revenue of $2.6 Billion.

I could write extensively about my thoughts concerning the fundamentals of both LinkedIn and Groupon; for now I will highlight one item (among many) that deserves particular attention - that of the outsized Price-To-Sales ratios.

Of course, there are many other private tech companies experiencing similar dynamics.  In aggregate, these huge, fast jumps in valuations - to (very) high valuations - should serve as a "red flag" that there is wildly excessive positive sentiment.

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1283.31 as this post is written

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