Investing

Biggest Internet IPO since Google: Should You Buy LinkedIn Stock?

| by Alex Groberman

On its first day of trading after its initial public offering, LinkedIn Corp. -- the largest professional-networking site on the Web -- watched its stock more than double in value.

The Mountain View, Calif.-based company’s shares rose from $47.99 to $92.99, after originally selling 7.84 million shares at $45 each. On May 17, the company raised the proposed range for the initial share sale from $42 to $45 and from $32 to $35. Ultimately, the sale garnered $352.8 million.

LinkedIn is a site that allows members to connect with business contacts, search for jobs, recruit potential employees and seek out industry experts for whatever reasons they may have. Users have the option of creating free personal profiles.

However, paid subscription accounts were created in 2005 to give recruiters better access to candidates and allow members of the community to communicate with one another.

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Approximately 70 percent of the company’s revenue is derived from business subscriptions.

According to LinkedIn, proceeds from the initial public offering will be used to fund existing operations and continue to develop the business. LinkedIn may raise as much as $405.7 million when all is said and done.

Though the company is often referred to in the same breath as popular social media outlets, it reminded investors in their prospectus that a “substantial” portion of its income stems from the software-as-a-service model.

Nearly half of LinkedIn’s $93.9 million in first-quarter revenue came from their hiring solutions business. Unlike Facebook and Twitter -- who rely heavily on advertising revenue -- LinkedIn’s ad revenue only accounted for 30 percent of its earnings.

Still, not everyone is sold on the company’s business model. Skeptics wonder if this is simply the latest offering in what many are considering a very volatile bubble.

Critics of the business -- the Wall St. Journal ran a headline declaring "Bubble Alert!" -- point to several key red flags that may make investors wary. For one, underwriters left more money than they should have on the table, not pricing the initial stock offering as highly as one would expect.

Two, the valuations of LinkedIn on thinly traded markets valued the company at $2.5 billion, whereas other valuations indicate the company is valued at $8.5 billion. That is a massive disparity, and one that typically means something is off. Finally, the simple fact that LinkedIn has provided investors with the biggest Internet IPO since Google is a big enough event to give pause, all the other concerns notwithstanding.

Fans of the company offer a different point of view. They note that LinkedIn is constantly adapting to a growing market that shows no signs of letting up, and that the business is an industry leader with enough net income to justify their high price per share.

While the debates will rage on LinkedIn’s legitimacy and valuations regardless, this much is clear: the comings days, weeks and months will paint a very clear picture for what type of future this company, and others like it have in the market.

What do you think: is LinkedIn a good stock to buy?