Wall Street Beat: IPO, Enterprise Sales Boost Tech
Excitement over LinkedIn's stunning market debut appears to have outweighed concerns this week about Hewlett-Packard and Dell earnings reports, which highlighted a desultory PC market.
LinkedIn shares more than doubled Thursday, closing at US$94.25, up from its $45 price, and continued their ascent through Friday morning, trading at $101.75.
"LinkedIn jumped into legend yesterday," said John Fitzgibbon, founder of IPOScoop.com. LinkedIn's opening day performance gave it a market valuation of more than $9 billion. This gives the company a staggering price-to-earnings ratio -- which compares a company's share price to its earnings per share -- of 554. The average technology company P/E ratio is about 15.
The LinkedIn P/E ratio is reminiscent of the too-good-to-be-true expectations of the dot-com era. There is, however, a marked difference between LinkedIn -- and other social networking sites expected to go public, such as Facebook and Twitter -- and those days.
"This is not another Internet bubble, this is not Insanity.com," Fitzgibbon said.
For one thing, LinkedIn has users, revenue and actual earnings, Fitzgibbon pointed out. The company made $15.4 million profit on $243.1 million in revenue last year. In the dot-com era, "you had all these 20-year-olds with unproven business plans that VCs were willing to throw the dice on, and there were 20 deals a week on the calendar." Now, there are only a small number of companies lined up ready to go public.
LinkedIn also dispelled clouds hanging over the social networking IPO scene after the debut of Renren, dubbed "China's Facebook," and porn-based FriendFinder Networks earlier this month. The value of both of those companies has plunged since their respective IPOs. In Renren's case, its accounting methods have been called into question. FriendFinder meanwhile, has publicly acknowledged it has a history of significant losses. LinkedIn is clearly in a different league, noted Fitzgibbon.
U.S. markets jumped on the news Thursday, with the Nasdaq closing up 8 points to 2,823.31, the Dow Industrials up 45 to 12,605.32, and the S&P 500 up by 3 points to 1,343.60. Exchanges around the world closed high during their respective trading days Friday.
However, in the U.S. on Friday morning, markets including the tech-heavy Nasdaq declined as retailers such as the Gap -- which slashed its annual earnings forecast -- displayed signs of weakening consumer demand. A dull consumer market is relevant to IT, as HP and Dell reported this week.
Results from HP, the world's largest IT company by revenue, confirmed analysts' expectations of a flagging consumer PC market. HP rushed out its quarterly results on Tuesday, a day ahead of schedule, after the Wall Street Journal leaked a memo from Leo Apotheker, about six months into his CEO tenure, cautioning executives to rein in hiring in the face of what he termed was a "tough" quarter.
For the three months ending April 30, HP experienced sluggish growth: Net profit of $2.3 billion on revenue of $31.6 billion, increasing just slightly from a net profit of $2.2 billion and revenue of $30.8 a year earlier.
Worse, HP trimmed its forecast for its fiscal year, to sales of between $129 billion and $130 billion, from a prior estimate of between $130 billion and $131.5 billion. HP blamed, in part, supply constraints in the wake of the Japan earthquake and a flagging consumer PC market for it troubles.
Perhaps more worrying, HP also expects services business to be slow. In what could be seen as a swipe at his predecessor, Mark Hurd, Apotheker said in a conference call that HP had inadequately invested in services.
To some analysts, the earnings report seemed like a litany of excuses, and they oiced concern about Apotheker's leadership. Among other things, company observers have been waiting for results from HP's promised push into cloud technology. "H-P has been known historically for consistency" noted Brian Marshall in a Gleacher & Co. in a market report, "Now they are known for inconsistency."
The silver lining for HP is that software licenses, a measure for how important HP offerings for big business are faring, increased 29 percent. Overall software sales rose to $764 million, from $653 million a year earlier
Enterprise sales helped saveDell's quarter. Dell, reporting Tuesday, said that sales of higher-margin servers and storage equipment to enterprises helped offset weak consumer PC demand. Dell said that in its first quarter, profit almost tripled year-over-year, to $945 million, even though revenue rose only about 1 percent to $15 billion.
Good results for sales to the enterprise tech sector throughout the past earnings season and excitement about social networking appear to have helped boost overall confidence in IT lately. Even though U.S. markets were down on retail news Friday, computer stocks on the Nasdaq were up 4.03 percent for the year and tech, media and telecom stocks on the New York Stock Exchange were up 5.84 percent for the year.