IPO Market Gets Social as LinkedIn Leads the Pack
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The Fiscal Times
May 19, 2011

LinkedIn, the professional networking site, begins trading publicly on the New York Stock Exchange Thursday morning at a price 40 percent higher than some were expecting earlier this month. It is the first of many such companies expected to have their initial public offerings (IPO) in coming months and could be a bellwether for the likes of Facebook and Groupon.

The stock price reflects the frenzy over a technology that has become the darling of the digital age. LinkedIn shares were priced at $45 per share late Wednesday, the high end of the expected range, which already had been raised from $32-$35. That works out to a $4.25 million market capitalization for the company, which some have argued is a sign of a new bubble. Based on its first-quarter sales of close to $94 million, LinkedIn is expected to have roughly $376 million in net sales this year, which translates to a relatively high 11.3 price-to-sales multiple.

“It's a hefty multiple, as with most rapidly growing technology companies,” says Henry Blodget , a former Internet analyst who is now CEO of Business Insider. “The company has an established, diversified business, however, so it's certainly not ridiculous.”

LinkedIn turned a profit of $15 million in 2010, although management has said it does not expect to be profitable this year as it aggressively expands its business. Company officials declined to comment beyond the company’s filings with the Securities and Exchange Commission.

Facebook boasts an even higher multiple at 13.8. “Some companies--Facebook, Zynga, Twitter, etc.--are carrying big valuations, but with the exception of Twitter, these valuations are supported by the underlying fundamentals. They're all expensive--hot technology companies usually are--but we're miles from bubble territory,” Blodget says.

LinkedIn is often lumped with Facebook in the online networking space. But it isn’t really a pure-play competitor. For one, LinkedIn has around 100 million members, according to its SEC filig, a large number but it pales in comparison to Facebook’s 600 million users. Unlike Facebook, LinkedIn targets individuals in the workforce who divulge details about their current and previous employers, professional responsibilities, skills, and experience. This creates opportunities to generate revenue by targeting special interests.

People generally use LinkedIn to share professional histories and connections while excluding professionally irrelevant details often included on other social networking sites. This allows users to develop new business opportunities and market themselves to prospective employers—a plus during the current financial crisis. Members can set up basic accounts for free. Premium accounts offer members expanded access and other tools. Premium subscriptions accounted for 21 percent of first quarter revenue.

LinkedIn also has proven itself an effective tool for corporate recruiters to identify new talent and potential employees in a streamlined way. As of March 31, 2011, approximately 4,800 companies subscribed to these professional screening services, generating 49 percent of first-quarter revenue. This could mean more than $185 million in revenue this year.

LinkedIn’s efficient and cost-effective marketing and advertising rates inspired corporate clients to market to other businesses and individuals, garnering 30 percent of revenue in the first quarter of 2011.

But competition is intense. Facebook is constantly evolving. In the recruiting space, Monster Worldwide and Careerbuilder have already established their footholds in the industry.

For now, LinkedIn appears to be more practical than Facebook and more robust than Monster Worldwide. But any user of any subscriber-based website knows how easy it is to change loyalties if a competitor offers a more compelling functionality and content. It happened when Friendster and MySpace users flocked to Facebook. It happened when Yahoo search and email users migrated to Google. Who is to say another player won’t come in and poach LinkedIn users? Because LinkedIn is priced at the high end at $45 per share, one wonders if only good news is priced into their IPO.

Related Links:
LinkedIn IPO Raises Bubble Fears (BBC.com)
LinkedIn Increases Share-Sale Price (Bloomberg)