LinkedIn is due to sell some $341 million of shares to the public later on Wednesday, and the intense demand for the stock so far could be a good indicator of how investors will receive IPOs from other social media companies like Facebook.
A raft of social media companies, including Twitter and Groupon, are expected to go public in the coming months and years.
Groupon has had talks with bankers about its IPO and is expected to hire Goldman Sachs Group Inc and Morgan Stanley for an offering that could value it at $15 billion to $20 billion.
Facebook, which has a private market value of around $70 billion, is widely expected to go public in April 2012 as its number of private shareholders rises above a certain limit set by U.S. securities regulators.
There is a feeding frenzy is going on, said Ben Howe, Chief Executive Officer of boutique investment bank America's Growth Capital.
There are companies that are going to have very strong positions in massive markets such as Facebook ... but I think most of the other companies that are riding on their coattails and getting these enormous valuations do not fit the same profile and are just extremely overvalued, Howe said.
LinkedIn will be the first test.
The company raised the expected price range of its IPO by 30 percent on Tuesday. At the midpoint of the new range, the IPO would give LinkedIn a market value of $4.1 billion.
The company will likely benefit from being the first U.S. social networking company to come public and will answer some questions about how investors view certain types of risk.
One of LinkedIn's biggest risks may be its gutsy bet on its future growth -- combined with an admission that it does not expect to be profitable in 2011 on a U.S. generally accepted accounting principles (GAAP) basis.
Frankly, they're a little bit arrogant saying, 'We're going to said Francis Gaskins, IPOdesktop.com president.
No final decision has been made but the IPO is currently expected to price toward the upper end of the revised range, said a source who spoke on condition of anonymity. The IPO is expected to price after the close of U.S. markets on Wednesday and start trading on Thursday.
After two years of losses, LinkedIn finally made money for its common stockholders in 2010 -- but then it was back to only breaking even in the first quarter of 2011.
In the risk factors section of its prospectus, LinkedIn said the rest of the year could be the same, or worse:
Our philosophy is to continue to invest for future growth, and as a result we do not expect to be profitable on a GAAP basis in 2011, the company said.
LinkedIn added that it expects its revenue growth rate to decline over time and its costs to increase.
The risk factors section of any prospectus is designed to encapsulate worst-case scenarios. Furthermore, it is not uncommon for an unprofitable company to seek a public listing.
But a profitable company flatlining or swinging to a loss in its first year as a publicly traded stock could prove an unwelcome surprise for investors betting on the booming growth of social media companies.
Earlier this week, the chief executive of LinkedIn's French rival Viadeo told Reuters his venture would delay its IPO, in part because of concerns of having to answer to shareholders about profitability.
Another peculiar fact about LinkedIn is that on some level it's not quite the Internet company most consider it to be.
Most of the biggest social networking sites make most of their money through online advertising or Internet services.
LinkedIn is an online platform but actually makes more money through so-called field sales, or a sales force
directly soliciting customers, agencies and resellers.
In 2010, 56 percent of LinkedIn's net revenue came from field sales. By way of comparison, only 44 percent of LinkedIn's net revenue came from online sales.
(Feet on the street) is an expensive sales force, IPOdesktop.com's Gaskins said. He added that almost half of LinkedIn's business comes from selling hiring solutions, which help match companies and job-seekers, a space where LinkedIn could face tough competition from niche job-seeking sites and traditional recruiting firms.
(Reporting by Alina Selyukh and Clare Baldwin; editing by Dhara Ranasinghe and Andre Grenon)