Is LinkedIn overvalued or will its growth prospects outweigh the risks?
LinkedIn plans on raising $1 billion so it can build more products and expand. So why does the market see it as a negative?
Before announcing its new stock offering, LinkedIn traded above $246 per share, the highest it’s been since going public in May 2011. This year has been very good to the company; shares are up 118% since January.
But, LinkedIn is now planning on raising money selling an additional 4.2 million shares, which is about 3.7% of the current shares outstanding. The $1 billion LinkedIn will raise through the offering is a little bit higher than its current cash position. But raising cash through an equity offering is generally seen as a negative for any company for a few reasons.
First is that it dilutes shares. Indeed, the market reacted promptly to the news that LinkedIn stock will be a little bit more diluted. The company’s shares fell 2% in pre-market trading.
Second is that equity is more “expensive” than debt, particularly in an environment where interest rates are even less than they were three years ago. Sure, the benchmark US 10-Year Treasury bond yield is twice what it was fourteen months ago, but it’s still below 3%.
When borrowing costs are low, it generally makes sense to borrow the money rather than sell stocks because shareholders want higher returns than lenders. And, if a company has solid financials and equally sold growth prospects, stockholders don’t want to give up shares of reward but would rather pay lower borrowing costs.
If, however, management feels the stock is overvalued, selling shares makes sense because they are essentially cashing out above its true value, thus making a sale of equity cheaper than borrowing. And, that’s a line of thinking that naturally can worry investors.
So, is LinkedIn overvalued or will its growth prospects outweigh the risks?
Looking at the fundamentals of LinkedIn is CNBC contributor Gina Sanchez, founder of Chantico Global. On the charts is Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson.
Watch the video above to see Sanchez and Ross analyze LinkedIn to help you decide.