Is the LinkedIn IPO Proof That We Are in a Bubble?

In the ‘90s, fresh startups were known as “websites” and “dot-coms.” Now that every company has a website, we simply refer to them as “tech startups.” For the average person, these labels are meaningless. Few people care about the way Groupon is classified so long as it saves them money. If Groupon were to lose its core feature, or if a superior competitor were to come around, consumers would start to lose interest in the company. Groupon would eventually fall and another empire would rise up. That's the way a free economy works. Investors see things much differently. They see the label “tech startup” and cheer, just as they did in the ‘90s when dot-coms were all the rage. This has created some fear among those within the financial community, who worry that for every Facebook and Twitter there will be 10 AOLs AOL. But even if they're right – even if we are on the verge of another bubble – there is no evidence that it will burst as painfully as the last one. LinkedIn to a Problem According to the Wall Street Journal, LinkedIn's LNKD crazy share price provides a valuation that is more than 520 times the company's 2010 net income. There is little hope that the company can sustain that kind of growth. There is even less hope that LinkedIn will live up to the social network legacy created by Facebook and Twitter, both of which have yet to go public. On the acquisition side, Microsoft MSFT just handed over $8.5 billion to acquire Skype. While some believe that Microsoft paid a premium to prevent Skype from being acquired by another party, others argue that the company has yet to prove its value. These are two of the most extreme cases, but they are far from the norm. While it is unlikely that Skype will be as beneficial to Microsoft as YouTube has been to Google GOOG, it is much too soon to call the purchase a mistake. Skype is still one of the most widely used video call, video conference and instant messaging tools on the Internet. If allowed to flourish on its own accord (as Microsoft claims it will allow), Skype could be a sound investment for the Windows maker. The Rising Tide The most distinct difference between the dot-com bubble of the ‘90s and the so-called “tech bubble” of the present day is the degree of quality that has gone into today's round of startups. While there are plenty of dot-coms trying to cash in on the flood of investors interested in fresh tech companies, there are many legitimate enterprises that are providing a valuable service to consumers and a solid return for investors. There is, however, one danger that threatens every investor in the tech industry, which brings us back to the LinkedIn IPO: bloated valuations. The idea that Facebook could be worth tens of billions of dollars is preposterous. The same goes for any new startup. Every company has its limits. If investors don't realize this, they only have themselves to blame when things go south. If You're Still Worried About a Bubble… Like it or not, investments – any investments – will always be a gamble. Investors need to continue doing their due diligence with every company they are tempted to invest in. If they do, they should be prepared to weather the incoming storm, whether it turns out to be a tornado or nothing more than a few drops of rain.