Investors are clamoring to connect with the online networking service LinkedIn Corp. in the latest sign of the fervor for Internet companies that specialize in bringing together people with common interests.
The demand to buy a piece of LinkedIn is so intense that the 8-year-old company is expected to make its stock market debut Thursday with a value of at least $4 billion. That would make LinkedIn's initial public offering of stock the biggest by a U.S. Internet company since Google Inc. went public in 2004, according to the research firm Renaissance Capital.
The appetite for LinkedIn's IPO encouraged the company's bankers to raise the asking price by about 30 percent Tuesday to $42 to $45 per share. It won't be surprising if the IPO is priced even higher Wednesday evening and then sells for more than that Thursday morning when they are expected to begin trading on the New York Stock Exchange under the symbol "LNKD."
The IPO is expected to raise about $200 million for LinkedIn and produce $125 million to $135 million for existing stockholders, who plan to sell some of their shares. The biggest winner will be LinkedIn's co-founder and chairman, Reid Hoffman, whose 20 percent stake in the company will be worth more than $800 million.
The coming-out party on Wall Street for LinkedIn, which focuses on connecting professionals online, could be the prelude to even more excitement if several popular Internet companies decide to go public during the next year. The list of candidates includes the online messaging service Twitter, online game maker Zynga, online coupon service Groupon and the biggest social network of all, Facebook.
"LinkedIn will be used very heavily as a modeling tool for other companies in this space," predicted David Menlow, founder of research firm IPO Financial. "The pricing is going to have a dramatic effect. This is just the starting point for valuation adjustments."
Facebook is the most prized among the Internet companies still awaiting an IPO. It was valued at $50 billion as part of an investment organized in January by Goldman Sachs Group Inc., a major shareholder in LinkedIn. If Goldman Sachs follows through on its plan to sell its entire LinkedIn stake in the upcoming IPO, the bank would receive about $38 million at the mid-point of the targeted price range.
LinkedIn, based just down the street from Google's Mountain View, California headquarters, has become profitable by building a website that acts both as a Rolodex and a hiring center.
People set up LinkedIn accounts to post the resume on a page and connect with current and past colleagues. LinkedIn members can then ask the people they know to introduce them to other connections that might help further their careers.
Although not nearly as popular as hanging out on Facebook, LinkedIn has emerged as a widely used directory. Through March, it had 102 million members and is adding another million each week.
The company gets about two-thirds of its revenue from fees that it charges for greater access to the website and more data about the expertise listed on each member's page. Businesses and job headhunters use LinkedIn to recruit people who might not even be looking for a job at the time. LinkedIn also has made money from business surveys of its members and a service that offer career advice to college graduates.
The rest of LinkedIn's revenue comes from Internet ads, which serve as the financial backbone for Google, Facebook and many other Internet companies.
The lofty appraisals being given LinkedIn and other online networking companies have raised worries of an investment meltdown if the businesses don't turn out to be as successful as enthusiastic investors anticipated.
That is what happened in the late 1990s when hundreds of unprofitable Internet companies attracted billions in venture capital and then went public to much fanfare. That led to a devastating collapse that still haunts Internet investors.
The big difference this time is that the current Internet darlings haven't rushed to the public markets. Instead, they are waiting until they have developed ways to make money while amassing massive audiences.
"These are serious businesses with huge global market opportunities ahead of them," said John O'Farrell, a partner with Andreessen Horowitz, a venture capital firm that owns stakes in Facebook, Twitter, Zynga and Groupon. "To an uninformed person, the valuations may look like a bubble, but we believe they will in fact prove to be very low valuations."
Last year, LinkedIn earned $3.4 million on revenue of $243 million. Its growth accelerated during the first three months of 2011, putting it on a pace to generate $500 million in revenue this year. Management, though, has warned that the company might lose money this year as it invests in more products and more computers to run its website as it tries to ward off competitive threats overseas.
If LinkedIn's IPO is priced at the mid-range target of $43.50 per share, the company would have a market value of $4.1 billion — about 17 times its 2010 revenue. By comparison, Google's current market value of $170 billion is less than six times its revenue last year. When Google went public, though, its market value of $24 billion was 16 times higher than its revenue from the previous year.