Ok, maybe the title hints that there is going to be some secret underground tactic for how to trade the LinkedIn (LNKD) IPO, but the truth is that my secret underground tactic works for all IPO’s! Ha! It’s not the first time I’ve revealed my strategy for trading IPO’s, but considering the biggest IPO since Google began trading today (aka the Facebook of business networking), I thought it might be a good time to revisit the tactic.
When an IPO like this hits the market the knee jerk reaction is to want to jump in as soon as it begins trading for fear of missing out on the next big thing. Taking a look at the open today with the stock more than doubling in price and surpassing $100, it definitely appears “the fear of missing out” trade is on big time! Jumping in on that kind of trade can be a big mistake and can often lead to large losses.
Before I get into the trading tactics let’s take a look at why LinkedIn (LNKD) is generating such buzz. First of all, it’s the highest profile social networking site to hit the market which in all likelihood will have Facebook and Groupon wondering whether they should hit the public market sooner rather than later. I’m sure investors and execs at both companies are seeing the dollar signs. LinkedIn is no slouch in the social networking world, but is still dwarfed by Facebook in terms of number of users, revenue and profit. It’s dwarfed in terms of valuation too. Based on the secondary market, Facebook has now reached a stratospheric valuation of around $70 billion while Groupon is being valued in the $15 – $20 billion range. I believe at the current price, LinkedIn is approaching a $7 billion valuation.
LinkedIn counts just over 100 million users and doubled revenues in 2010 over 2009 to $243 million with a net income of $15.4 million. However, the company says it does not expect to be profitable on a GAAP basis for 2011 and is forecasting declining revenues and rising costs going forward (according to Reuters). For comparison sake, Facebook has more than 600 million users and reportedly earned $1.2 billion in revenue and $355 million in net income for the first nine months of 2010. Now you begin to see the kind of frenzy a Facebook IPO would generate if it were to go public too.
Many are beginning to question LinkedIn’s valuation as murmurs of another tech bubble begin to grow. Shares were priced at 17.5 times the company’s 2010 sales (that’s BEFORE today’s parabolic move). That compares with Google’s valuation of about six times. Is the move justified for a company that doesn’t expect GAAP profits this year or for a company that TheStreet.com says is becoming far less useful? Common sense would say absolutely not, but then again any of us who have been involved in the markets for some time knows that common sense and reality are often two sides of the coin. The “fear of missing out” trade can go on longer than we think. Does that mean you should jump on the bandwagon? In my humble opinion – NO.
That leads me to a discussion of how best to trade IPO’s, particularly an IPO that has soared out of the gates. In a nutshell, the best strategy is to WAIT. You want to see where this thing settles out, or more technically, where it forms its first base… a bullish triangle, a short base, a longer cup with handle or double bottom base. The hottest IPO’s often don’t base very long, but in my experience it’s best to wait at least two weeks from the open to get a feel of where resistance and support may be. After two weeks, I’ll revisit the LinkedIn IPO and post a chart with my analysis along with examples from the past. Good trading out there and do not chase this IPO!