Bubble in Theory, Not Reality

I read a somewhat interesting post on Reuters about LinkedIn’s recent IPO. In theory, LinkedIn’s first day price fluctuation and the week following the IPO, depicted a bubble. Three academics, Robert Jarrow, Younes Kchia, and Philip Protter, have created a model which they say proves their theory.

The paper they authored is currently being peer reviewed and will soon be released. What the paper essentially talks about is the volatility of “any other stock” compared to that of LinkedIn stock. The gut feeling out of the LinkedIn IPO compels one to say it is a bubble and the paper proves that point in theory.

I am still not convinced LinkedIn is a bubble stock and here’s why:

LinkedIn has a revenue generating service, can make a profit, is not “run-of-the-mill” startup that went to NYSE to cash in and above all, has an excellent management.

Of course there will be a price correction and the stock will close well under $40 by the end of this year, my speculation, but that doesn’t mean the company is fad. The paper in question does pose another interesting question that assumes that most social media companies to follow will create a dot com era bubble in the stock market.

Personally, I don’t think investors are that stupid. Memory of dot com bubble burst is still fresh in the valley. And yes startups are getting grossly insane evaluations, mostly undeserving, but it’s human nature to be part of the next big thing or bust. On the other hand, people who are trading the stock in the secondary markets are the ones who will lose if those startups fall flat, not the average investor.

Did I mention that Groupon filed for IPO?