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For those who lived through the .com boom and bust of the late 1990s, the last decade has been interesting. The internet is now bigger, and stronger. Today's success stories, including Facebook, Groupon and Zynga, have taken center stage, and look set to cash in.

Yesterday, LinkedIn, the popular social network for professionals went public. And boy did investors party like it was 1999.

The company's shares were priced at $45 on Wednesday, and debuted on the New York Stock Exchange at a whopping $83 per share. By the market's close, LNKD sat at $94, giving the company an $8.9bn valuation.

Given that LinkedIn earned just $15.4m on $243m in revenue last year, it's no surprise that those who still remember 1999 are scratching their heads and asking the question, "Haven't we been here before?"

The answer to that: yes, and no. By any reasonable measure, LinkedIn's valuation cannot be supported by the company's fundamentals alone.

But past isn't always prologue, and it would be a bit presumptuous to assume that just because LinkedIn's valuation seems to significantly outpace its financials we're at the beginning of a new bubble in the public markets that will see overhyped internet companies eventually leaving retail investors, like grandma, bankrupt.

The reality is that LinkedIn's valuation is more a reflection of the thirst investors in the public markets have for hot internet issues than it is of collective insanity 2.0.

There haven't been a whole lot of sexy consumer internet IPOs in the past decade, which explains why companies like LinkedIn and OpenTable attract so much demand. That demand, of course, outstrips supply, so LinkedIn and OpenTable trade at significant premiums.

The good news is that unlike so many of the companies that went public in the late 1990s, today's internet hotshots have real revenue and most are either close to profitability or already profitable.

The public markets may overvalue them, but nobody can say that they aren't viable businesses right now. The bad news, of course, is that even though markets can remain irrational longer than men can stay solvent, insane valuations are eventually corrected.

Ironically, the key to ensuring that valuations don't get too insane, almost certainly leading to more painful corrections down the road, is for more technology companies to go public. Few are asking for a repeat of Boom 1.0, but LinkedIn hints that the public markets still believe that internet's best days are ahead of it. And that's probably a good thing for all of us.

Patricio Robles

Published 20 May, 2011 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

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Comments (2)

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Jason Walker

Having lived and worked through the first .dot com boom, I am pleased that interent companies are getting the credit they deserve but how on earth can 9.2 billion be a justified figure !!!

about 5 years ago

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John Green

LinkedIn over the years has become a viable tool for professional/social networking. It is now used for recruiting as well as meeting and interacting with fellow professionals. They deserve the rewards they are reaping.

over 3 years ago

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