Seeking LinkedIn's real value
LinkedIn’s float on the New York Stock Exchange has blown away expectations, with the share price soaring on debut to close at $US94.25 after hitting a high of $US121.97, delivering the company a valuation of around $US10 billion.
That means every one of LinkedIn’s 102 million members is valued at around $US90, based on LinkedIn's market value.
Private-market trading of LinkedIn shares ahead of the IPO gave the company a valuation of about $US3 billion.
LinkedIn says roughly one million new members join the site every week, which equals more than one new member a second.
But even with that kind of growth, the company has not yet delivered the stellar revenue of the companies it could be fairly compared with. According to a Reuters report the company has admitted it does not expect to be profitable in 2011 on a US generally accepted accounting principles (GAAP) basis.
The company's shares were sold at about 17.5 times its 2010 sales. By comparison, Google Inc's shares are valued at about six times 2010 sales. But there are fairer, though no less damning comparisons to be made.
In Australia LinkedIn’s registered member base recently hit 2 million. A spokesperson for LinkedIn refused to comment on how many of those are active, probably because it seems LinkedIn doesn’t actually know.
In February, BNET reported on a detail contained within LinkedIn’s Initial Public Offer document that explains why the business is so focused on its hiring solutions and premium subscriptions products, as opposed to advertising, or what it calls ‘marketing solutions’.
In the “risks” section of the offer document LinkedIn notes:
“… a substantial majority of our members do not visit our website on a monthly basis, and a substantial majority of our page views are generated by a minority of our members.”
That’s a big issue for LinkedIn if it continues to rely on advertising on its site to its members as a way of monetising them.
In reality, LinkedIn is busy growing its hiring solution business, something the local spokesperson was more willing to talk about, telling Technology Spectator LinkedIn now has 21 ASX-listed companies using Hiring Solutions.
Hiring Solutions is essentially a job posting and search service that leverages the vast amounts of candidate data held within LinkedIn.
Looking at the chart below, it's clear LinkedIn has done well at boosting this part of its business in recent years.
This essentially means LinkedIn is really a recruitment search company and anyone looking to invest in LinkedIn should really be comparing the company with other job sites, and not social networking companies like Twitter and Facebook.
In the lead up to today’s float talk was of LinkedIn being part of a social media bubble, compared alongside China’s Renren whose shares soared 29 per cent after floating earlier this month but then dropped back below the initial offer price.
Instead investors should be looking at the market cap of firms like Monster.com, and in Australia, Seek.
The story is a familiar one if you compare Monster.com’s dot com boom peak of $US150 a share and market valuation of $US8.4 billion in 2000, on revenue of $US1.3 billion.
Last year Monster Worldwide posted revenue of $US914 million (nearly four times the revenue of LinkedIn), and the company made a loss $US32.4 million. Monster today has a market cap of $US1.9 billion, nothing like the $8.9 billion driven by tech bubble 1.0 hype.
Closer to home, Seek has a market cap of $2.35 billion. It claims 4.8 million unique browsers a month, valuing each visitor at around $48.
In February Seek posted a record half-year profit of $47.9 million on revenue of $159.5 million. I know where I’d be putting my money.
One area where LinkedIn has managed to impress is the growth it has delivered in members when compared with the total number of staff it employs.
As of March 31, LinkedIn had 1,288 employees around the world, and as far as we can tell, less than five in Australia. At $US97 per share, the company's market value is roughly $US7 million per employee.
Seek by comparison has 400 employees confined to the Asia Pacific region, which at yesterday’s closing share price of $6.98, makes its market value $5.88 million per employee.
Which proves if you can get a network to build your business for you, you have a distinct advantage over more traditional businesses.
With Reuters.
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Using LinkedIn for recruitment recently along side Seek I found LinkedIn preferable, easier to review candidates and we have hired someone from that listing so as a first time customer of the recruitment side of things it was a pretty positive experience
>"This essentially means LinkedIn is really a recruitment search company and anyone looking to invest in LinkedIn should really be comparing the company with other job sites, and not social networking companies like Twitter and Facebook."I agree, that in part, Linkedin may look like a hybrid social network, while being valued as a job search engine, however a core business source of revenue this article doesn't address at all is Linkedin's freemium revenue model and that users can purchase three levels: Business, Business Executive and Executive. And these levels range from around US$20 to US$100 per month.Members can, and are encouraged to upgrade their account to these paid levels of membership which in turn unlock more usability and functionality such as: information about who has visited your profile, the ability to send messages without becoming contacts, the ability to broaden and personalise searches as well as more detailed job hunting / opportunities, etc.Unfortunately I haven't been able to find any data from Linkedin about what percentage of users have any of the levels of premium services, but I'm willing to bet it is a decent slice of revenue and something that will grow significantly in the future.At current membership levels of 102 million users, it wouldnt' take much for them to significantly improve their bottom line by increasing the percentage of paid users who were free, or business users, to a higher membership level. All Linkedin really needs is 3 - 5% of the 1 million new users coming on each month to buy the lowest level of paid membership and their revenues increase dramatically.A core difference between Linkedin and Facebook and Twitter is that the membership style freemium model has been there from the start and is part of the user experience from day one - unlike F'book or Twitter which would have to introduce it, and could 'shock' their users during that process.Given Linkedin's additional and alternative direct-to-user monetisation opportunities a straight comparison with F'book, Twitter, Seek, Monster etc isn't wholly applicable as those competitors don't have those options. Taking that into account, Linkedin's exception-to-the-rule market valuation makes a little more sense.