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Forget LinkedIn - some tech stocks are still cheap - Outside View by MoneyWeek

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Forget LinkedIn - some tech stocks are still cheap
May 28, 2011

Eleven years ago, the bursting of the first tech bubble - the dotcom bust - laid the foundations for an era of lunatic monetary policy that continues to this day.

Fuelled by the low interest rates that were meant to cushion the US economy from the stock market collapse, a colossal property bubble inflated then exploded.

This almost destroyed the global financial system. This in turn gave central banks a green light to pursue even more crazed monetary experiments.

And now we have Tech Bubble 2.0 - or so everyone says, at least.

LinkedIn's share price has more than doubled in a day

Social network website LinkedIn saw its share price more than double when the company went public in New York yesterday. Shares began trading at $45, hit a high of $122.69, then ended the day at $94.25.

That would give the company a value of $8.9bn. That's 36 times last year's sales. In case you're in any doubt, that's a lot. Sure, the company is growing fast - it doubled revenues last year to $243m. But profit came in at just $15m.

If you're not familiar with LinkedIn, it's basically Facebook for business. Just as people use Facebook to update their friends on their personal lives and share links to websites they might be interested in, LinkedIn is used to connect with people you might want to do business with, for job hunting, recruitment, and all the rest of it.

They're both 'social networks'. I can't say I use either site much, but a lot of people do, which is the main reason I'm on them in the first place. The secret to success for these companies is to become the most widely-used platform in their particular niche. They then have a captive audience whose data they can exploit ('monetise' is the jargon) in various ways, and try to sell extra services to.

By the way, if all of this Tech Bubble 2.0 stuff leaves you feeling confused, we did a profile of the major players and their companies last year. If you don't know your tweets from your pokes, have a read of it.

People bought LinkedIn because they can't wait for Facebook

So why did LinkedIn do so well on listing? Scarcity value has a lot to do with it. Plenty of people want a piece of this sector. Renren, one of China's biggest social networks, listed earlier this month, but LinkedIn is the first US group to do so.

As one wealth manager told the FT, "investors are buying LinkedIn because they cannot get into Facebook. People are just really desperate to get into social media."

Also, given that there is a swathe of similar companies waiting in the wings, the investment banks behind this IPO had every incentive to ensure it made a big splash. By making a success of the LinkedIn IPO, they have more chance of being chosen by future stock market debutants.

Is this really Tech Bubble 2.0?

But is the company really worth that sort of money?

The fact is, it's easy to point at a rising asset that you don't understand terribly well and say: "that's a bubble". After all, it's what gold's most ardent critics have been doing ever since the price crept above $300 an ounce or so. And it's what everyone said about commodities, at least until China became the world's great hope for economic salvation. And bubble-spotting makes for a good headline, of course.

But I think we're a long way off anything as all-encompassing as Tech Bubble 2.0. As Youssef Squali at Jefferies points out in the FT, "80% of internet companies are trading at reasonable levels." At worst, this is a bubble in "companies that do stuff that's a bit like Facebook".

And it may not even last. Renren shot up by 71% on the day it listed. But already the share price is back below its IPO level. Of course, that's as good a reason as any to hold off making a judgement on whether to buy LinkedIn for a few weeks at least.

It's not a stock I'll be buying. LinkedIn looks very expensive, however you try to justify it. But then, I didn't buy Google either, for similar reasons. And compared to some stocks in the original tech bubble, LinkedIn's IPO performance has been positively sober. In 1999, some IPOs jumped three or four-fold on listing. And at least LinkedIn actually turns a profit.

So if you are interested in this area, and think you have some deep insight into the social networking sphere that will enable you to pick future winners from tomorrow's Betamax recorders, then go ahead and dabble. I'll stick to punting my 'speculative' money on the forex markets.

However, if you are looking for bargains in the tech sector, there are some cheap-looking stocks around. One option worth looking at is Cisco (Nasdaq: CSCO). The company is basically a 'picks and shovels' play on online stocks - it supplies the infrastructure behind the internet.

The company is having ongoing problems as it copes with a major restructuring. But it has a huge cash-pile ($25bn net or thereabouts) and it trades on a p/e of less than 10. It's the kind of stock I'd be much more inclined to buy than LinkedIn. Paul Hill took a closer look in a recent issue of MoneyWeek magazine - you can read his piece here: A good play on the future of the internet.

This article is authored by MoneyWeek, the UKs best selling financial magazine. MoneyWeek offers intelligent, easy-to-read analysis of the financial news, with practical investment advice.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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