Why Facebook and Linked In IPOs Might Scare Users

For some reason, I think I felt comfortable that my personal data was controlled by a small collection of private companies. Facebook, Google, Linked In are the big three that come to mind.

Linked in header image

Google has been public for several years and knows alot about me. And you. What web sites you browse, what you write in your emails, your preferences, your phone number, your personal details. The fact that they also know this about the rest of the world for some reason gave me comfort.

The fact that they also had hundreds of millions and now billions in search revenue also made me feel good. Would they bother jeopardising that in order to sell my data to people? I doubt it but maybe.

I’m also generally not too worried about it which helps.

That said, Linked In’s IPO and Facebook’s coming IPO have got me thinking. Linked In’s first day multiple of 300-600 times earnings implies that public shareholders either plan on making a lot more money than they currently are from these companies or that they love losing buckets of cash in the near term. Or that they’re speculating it will go up more like in the 1998-2001 internet boom.

What i’m wondering is what are they going to have to do to raise earnings in the manner they’ll need to to justify their valuation? Surely they’ll have to start making some decent money somehow?

Will Linked In start calling me and offering me jobs? Will Linked In or a post IPO Facebook sell my data to companies to advertise to me? I was less worried about these things with their private company CEOs at the healm and a smaller group of VC investors and rich Goldman Sachs clients as shareholders. But trading at multiple hundreds times current earnings, I’m not so sure. The profit growth has to come from somewhere.

With the post IPO Google, I not only didn’t think about much about this but I effectively didnt’ have a choice unless I wanted learn Chinese and try out Baidu.

With Facebook and Linked In I do have a choice. I guess less so with Facebook because it is a great tool for staying in touch with people. Linked In, however, I would happily ditch in a heartbeat if the concerns above worried me.

Luckily, they don’t worry me too much so i’m unlikely to leave these sites.

But I imagine there are millions of people out there that these concerns do worry. Will people use these sites the same way now that they’re publically owned? Should they? Will they do things differently? Are Linked In and Facebook less valuable as public companies at such high valuations?

Either way, Goldman Sachs who has already unloaded its Linked In shares and the pre IPO shareholders look likely to profit.

Users of Facebook and Linked in? I wonder.

2 Responses. Add Yours!

Discussion

  1. Posted May 25, 2011 at 12:31 am

    First off, just wanted to say “nice picture!” I’ll have to remember it for my next finance post.

    “Linked In’s first day multiple of 300-600 times earnings implies that public shareholders either plan on making a lot more money than they currently are from these companies or that they love losing buckets of cash in the near term.” This is a super interesting quote, and my guess is the later. People love losing money. There are few things that people do better than lose lots of money for no obvious reason. There is a reason however, it’s just not obvious. Most people are utility maximisers, not profit maximisers. The obvious question is “why do people invest money in expensive yet trendy stocks to make themselves feel good”? There are certainly cheaper whys to feel good about oneself.

    The trap is that people “feel good” about investing money when everyone else is investing their money. So, when trendy IPOs like Google, LinkedIn and Facebook are charging crazy multiples for their stocks it is certain that this is not being driven by investment fundamentals.

    Thoughts?

  2. James said:
    Posted May 25, 2011 at 4:13 pm

    i agree with most of that except that people love losing money. I think they might have other reasons for investing as you suggest and then get annoyed and fed up when they finally lose money. Then they swear off the stock market until they do it again next time.

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