People are Starting to Realize LinkedIn was a Bubble

The first day of LinkedIn’s debut was filled with much excitement and media fanfare. Even though valued at $45-a-share, the stock hit an amazing high of $122.70. But there were some people, like myself, not so excited. I felt that LinkedIn could not be valued so highly unless their was a plan to validate the value. LinkedIn is a great professional social media tool and makes it money from advertising but what else could the company do beyond maintaining current operations and software updates, especially with millions more dollars, which is what the high stock numbers equates to. That day, I watched “Mad Money” on CNBC. If you’re familiar with the show, you know Jim Cramer, the host, is very animated, aided by a colorful set and a sound effect board. The beginning segment of the show was without the extras and had a serious tone. Why? Because Jim Cramer had experienced the dot-com bubble and survived. He clearly stated that LinkedIn acted and smelled like a bubble; the company was good but not worth its value; and a lot of the spectacle and cap on shares on the initial day were tools to hype the stock and thus cause a buying frenzy. He was serious because despite having the dot-com bubble as a means of reference of past mistakes, we were repeating the past. Also, the warnings of a bubble have been floating the internet for some time (I wrote a post on this months ago); the “bubble what?” ignorance of LinkedIn’s opening was sad. Now, the stock has dropped significantly and both the current price and academia are stating, for sure, that the stock was a bubble.

According to “LinkedIn shares were a bubble - academic model” by Clare Baldwin of Reuters.com, three academics have written an academic research paper, which presents a model for determining a bubble.  The article reports,

“The model, described in a paper currently being peer-reviewed for publication, compares the size of price fluctuations, known as ‘volatility’ with the volatility of a normal stock, which is a stock whose price is what you would pay if held it forever. If the volatility in the stock you are testing is higher than that of a normal stock, there is a bubble.”

The model was tested using stats from dot-com stocks from its bubble and it tested correct. Based on the model, the article reports the model states LinkedIn is a bubble. And Shira Ovide of WSJ.com (Wall Street Journal Online) is reporting the stock’s closing price yesterday is 18% below the closing price on its debut and 37% from its high of $122.70. According to their article, this means if someone bought the stock from its high and have yet to sell it, they have experienced an 18% to 37% loss per stock.

The point…

LinkedIn was a bubble. The academic model may not mean much to some and for those not familiar with any (I’m still learning myself) “stock talk” the quote about the model might be confusing; nevertheless, no one needs an academic model or years on Wall Street to realize a hyped value when you see it. As mentioned, LinkedIn is a good company but unfortunately the beating its value took from initial overvalue will overshadow its true value. It sadly seems as if the dot-com bubble will live a second life as the tech bubble of the 00s.