Forgetting History with LinkedIn?

While we do not seek to ignore the lessons of history, it is not unusual for us to forget them.  The recent initial public offering of LinkedIn, a social networking web site for professionals, may be yet another example of memory loss.

As the financial newspaper Barron's pointed out, LinkedIn stock traded at astronomically high valuations after its initial public offering -- 35 times its 2010 revenue and 550 times its 2010 profits.  At that time, by comparison, Google was valued at 5 times revenue and 20 times its trailing profits. 

Back in the day, when Microsoft's shares were originally offered to the public in March 1986, its stock price rose 32% on the first day of trading.  LinkedIn's shares nearly tripled in price on the first day of trading.

Maybe investors believe that LinkedIn is poised to grow by leaps and bounds, which validates such a lofty price.  Maybe investors' memory of the tech bubble imploding in the early 2000's has faded.

Constant growth and success are not guaranteed.  In another article, Barron's noted that IBM's stock-market valuation temporarily exceeded that of Microsoft's a few weeks ago.  During the tech stock madness, Microsoft's value surged to three times higher than that of IBM's.  Barron's suggests that IBM has not caught up to Microsoft; rather, Microsoft's position has declined in the face of competition to desktop computers from tablets, smartphones, and other connected devices.  Even the great ones can cool off over time.

Nothing in the preceding discussion constitutes a recommendation to buy, sell, or lovingly gaze upon the stocks that are referenced above.  As always, carefully assess your risk tolerance before proceeding.

Words of Wisdom

History is merely a list of surprises.  It can only prepare us to be surprised yet again. -- Kurt Vonnegut