Explain LinkedIn's Valuation To Me

As an admitted LinkedIn neophyte, I was hoping you guys could help explain their valuation to me. As most of you probably know, they filed to go public on Monday, planning to issue up to 7.84 million shares for as much as $35 apiece. This will give them 94.5 million class A and B shares total, valuing the company just north of $3 billion.

I'm on LinkedIn, but I admit I don't use it much. I keep in touch with a couple of journalism associations of which I'm a member, and I usually add articles or links to my profile if a publication I've written for asks me to. Beyond that, I really don't know my way around the platform. But I know LinkedIn is huge for professional networking, and I know a lot of you use it extensively, so tell me about their revenue stream.

I know part of it comes from their premium subscription model, but aside from finding out who's been stalking your profile I don't know the benefits of upgrading from the free service. The company also receives ad revenue of some kind. Like I said, I'm not on it enough to notice any ads. Finally, they offer some service for headhunters.

As far as the numbers go, it looks like 2010 was their first profitable year and they managed a pretty meager $15.4 million, giving the company a pretty stratospheric 200:1 P:E ratio. Way too rich for any sane person's blood, but just about any handful of crap flung against the wall seems to be sticking in today's market, so who knows?

I'm mostly curious because this IPO will likely be a precursor to a number of social media IPOs in the coming two years. Obviously Facebook, Twitter, and Groupon have garnered valuations on the private market that many consider absurd (myself included), so I think the LinkedIn IPO will be an important litmus test for these others when it comes to their reception in the public markets.

What am I missing? Their purported use of proceeds is for "general corporate purposes", which scares the shit out of me because that's usually code for "insiders cashing out".

How is this company worth up to $3.5 billion (if they go full shoe at the upper end of the range)? Anyone from B of A or Morgan Stanley (lead underwriters) care to chime in and sell me on this deal? Anyone???

 
mxc:
with 100m members, a 10x EBITDA valuation would mean perhaps 5$ per member per annum. Not that stratospheric.
I'm leaning this way.

The main difference between this tech bubble and the last is that this time around, the companies are much larger and have institutional support Facebook or are an institution [Microsoft ->skype]

Honestly though, I don't know a lot about tech and aside from jumping on the post IPO rise, I stay away from them.

Get busy living
 
UFOinsider:
mxc:
with 100m members, a 10x EBITDA valuation would mean perhaps 5$ per member per annum. Not that stratospheric.
I'm leaning this way.

The main difference between this tech bubble and the last is that this time around, the companies are much larger and have institutional support Facebook or are an institution [Microsoft ->skype]

Honestly though, I don't know a lot about tech and aside from jumping on the post IPO rise, I stay away from them.

Actually the main difference this time around is that the Internet companies have significant revenue and profitability in addition to growth. The level of institutional support is merely a reflection of that.

 

I could be wrong, but I believe every major employer purchases the subscription service for their recruiters. That subscription model could be tapping into the deep pockets of banks/firms/etc. Regardless, it's hard to quantify without opening their books.

I'm incriminating myself.
 
Best Response

I can't comment on the valuation number, but I don't know if this is perfect example of "cashing out".

Yes, those guys are going to get paid handsomely for having a facebook for grownups, but they're going public with a not-so-common style of stock structure like you mentioned Eddie. The dual-class stock structure essentially gives the people that are currently running the company B-shares that have 10x the voting power of a regular A share.

What this means to me is that these current owners (Reid Hoffman, plus capital firms Sequoia Capital, Greylock Partners and Bessemer Venture Partners) will retain a controlling interest loonnnngg into the future. Cashing out? Maybe. Getting rich while still maintaining control? Yes.

http://dealbook.nytimes.com/2011/05/10/plans-for-linkedins-i-p-o-may-ma…

 

The best part of the movie the Social Network was the fact that Zuckerberg didn't invent anything. He wanted to do a "classier" job of replicating the social website genere of which myspace, friendster, match.com already dominated. It will only be time before someone can make a better linked in, or at least one strong enough to take away from it's grasp of the "market".

The valuation is what it is because it's probably just big enough of a premium to ensure another company wouldn't take them over.

 

This IPO will be one of the biggest flops in history. The underwriters will not be able to sell most of the stock at that price, and if they do, the stock will crash by more than 20% within the first week. This tech bubble is insane and it's only just getting started. If LinkedIn crashes now that will prevent a real bubble from emerging, since other IPO's will be put off. People never learn. LinkedIn has got nothing. The vast majority of users sign in less than once a month on LinkedIn (according to the prospectus).

 
Il Cavaliere:
This IPO will be one of the biggest flops in history. The underwriters will not be able to sell most of the stock at that price, and if they do, the stock will crash by more than 20% within the first week. This tech bubble is insane and it's only just getting started. If LinkedIn crashes now that will prevent a real bubble from emerging, since other IPO's will be put off. People never learn. LinkedIn has got nothing. The vast majority of users sign in less than once a month on LinkedIn (according to the prospectus).
Das war eine ausgezeichnete und sinnvolle Kommentar
 

So let me get this straight:

I am on a message board full of prospective financiers who don't have even the slightest clue what LinkedIn's business model is?

The company is going public and has filed repeated S-1 reports, the most recent S-1/A discloses the most recent financials for 1Q 2011. There exists very clear disclosure about how this company makes money, and it is simply unacceptable to comment on LNKD without being briefed on these facts.

Maybe a monkey out there can open the S-1/A and disclose the details of 1) revenue growth and 2) EBITDA margin.

 
gamenumbers:
So let me get this straight:

I am on a message board full of prospective financiers who don't have even the slightest clue what LinkedIn's business model is?

The company is going public and has filed repeated S-1 reports, the most recent S-1/A discloses the most recent financials for 1Q 2011. There exists very clear disclosure about how this company makes money, and it is simply unacceptable to comment on LNKD without being briefed on these facts.

Maybe a monkey out there can open the S-1/A and disclose the details of 1) revenue growth and 2) EBITDA margin.

You weren't a tech broker in March 2000 by any chance were you?
 
gamenumbers:
So let me get this straight:

I am on a message board full of prospective financiers who don't have even the slightest clue what LinkedIn's business model is?

The company is going public and has filed repeated S-1 reports, the most recent S-1/A discloses the most recent financials for 1Q 2011. There exists very clear disclosure about how this company makes money, and it is simply unacceptable to comment on LNKD without being briefed on these facts.

Maybe a monkey out there can open the S-1/A and disclose the details of 1) revenue growth and 2) EBITDA margin.

According to S-1 LinkedIn revenue growth is largely correlated to new member registration. They rely on hiring solution and member service upgrades - if LinkedIn's services are effective these (often 12 mo. duration) services will grow from new & renewed subscribers. Big takeaway here is if recruiters aren't getting the right talent from linkedin the 'viral effect' of the service won't work. Due to the nature of these 12 month services, a one year lag in actual performance should be realized.

 

Agree with Cjohn. Not only are they keeping a controlling interest via a dual-class share structure, Hoffman and his VC backers are selling barely anything at all (although GS is apparently selling its entire stake).

LinkedIn has true potential. The ability to apply too jobs using your "resume", as well as allowing recruiters to find you, gives it a really interesting twist not available in larger social networks. I recently read "The Future Arrived Yesterday" by Mike Malone (of The Virtual Corporation) and in it he describes the Protean Corporation, which is a corporation with a solid core of employees which hires contract workers at any given time for a specific task or project, and then after the work is performed the arrangement ends. LinkedIn is the perfect platform to complement that type of work. Individuals can find work, list their experiences, and can now even add specific skills that they have. Corporations looking for employees for a specific task can build a team using workers they find on the platform. The potential is there if they can find a way to make the product more than just a networking platform. I'm bullish on social media in general but LinkedIn is a very established company (founded 2003, before social media was even a thing) which has the potential to really perform well over the long haul.

looking for that pick-me-up to power through an all-nighter?
 

I think you guys are missing a key point. LinkedIn is valuable because its userbase is incredibly valuable. Most people who are on LinkedIn are like Eddie and many of you: high level service professionals with a good amount of discretionary income. There's a goldmine of data from this demographic that could be sold for very high prices as well as command high advertising rates. Imagine if a company wanted to know more about bankers in NY. LinkedIn could easily run a search and grab thousands of matching profiles in an instant and supply information that hasn't been supplied before. What other website has had that kind of power? A lot of money can be made that isn't as visible such as the subscription service, which by the way, is pretty popular among recruiters. I think the growth potential of LinkedIn is strong because of its ability to aggregate data from an expensive demographic. To me, that justifies a $3.5b valuation.

 

The company isn't yet profitable. We are to assume the value is based off potential future cash flows. It would take a lot more revenue for them to get any decent sized dividend. I don't think they are going to grow any quicker or add more services in the near future with the IPO money than they already have. I would not invest in this...

However if Dropbox ever goes public, let me know. That program is genius.

 

Here's the S1: http://www.sec.gov/Archives/edgar/data/1271024/000119312511016022/ds1.h…

Notice, how the only metrics they stress are: user / Unique visitors / page views. I could create a prospectus for Youporn.com, using the same metrics and some nice prose on how we have a dedicated, easy-to target customer base prone to instinct purchases, and come up with a higher value. My point is, if you want eyeballs, invest in AOL. They own hundreds of popular websites and they continue to lose money.

 
Il Cavaliere:
I could create a prospectus for Youporn.com, using the same metrics and some nice prose on how we have a dedicated, easy-to target customer base prone to instinct purchases, and come up with a higher value.
Actually, are there any public nopr sites? For very obvious reasons, I'm not going to do a search for this using company systems....
Get busy living
 
UFOinsider:
Il Cavaliere:
I could create a prospectus for Youporn.com, using the same metrics and some nice prose on how we have a dedicated, easy-to target customer base prone to instinct purchases, and come up with a higher value.
Actually, are there any public nopr sites? For very obvious reasons, I'm not going to do a search for this using company systems....

This is awesome. I await the official outcome of this query when people get to their home computers. My guess is no, and Playboy is dead. Its basically only valuable as a brand like Polaroid, or Westinghouse, or Pan Am.

 
UFOinsider:
Il Cavaliere:
I could create a prospectus for Youporn.com, using the same metrics and some nice prose on how we have a dedicated, easy-to target customer base prone to instinct purchases, and come up with a higher value.
Actually, are there any public nopr sites? For very obvious reasons, I'm not going to do a search for this using company systems....

I cover Internet companies, and I don't believe there are any of these types of sites are public (maybe outside the US? doubtful but I don't know). I have run traffic reports on these sites however, and the traffic is impressive.

Aside from the fact that no Investment bank would touch them with a ten foot pole, the business has a serious problem with the fact that the type of content hosted on these sites is not advertiser friendly. These sites are forced to look elsewhere to generate revenue through subscriptions, webcams, etc.

They also use affiliates to generate traffic, so I would imagine they incur significant TAC which erodes gross margin. So ARPU on these sites would likely be far lower than on a 'normal' site, although I have run traffic reports and they do indeed generate massive traffic. I can't remember exactly but the big ones are like 30-50% of Google, if I am remembering correctly. (but unlike Google, these companies are not generating $8 - 9B of revenue per quarter)

 

Alone, their valuation is crazy. Compared to Facebook at 55b, they're a bargain.

Like HarvardorBust said, it's not the number of users they have, but the kind of users they have. If you have a group that is 95% comprised of a specific demographic, it is far easier to monetize them. LinkedIn captured an uncommonly valuable demographic: young, motivated, working professionals.

What's more, LinkedIn is actually able to directly sell the information on these accounts through recruiter licenses. Having an actual product, in this case a database of users, is far more valuable than the targeted ads facebook can sell. At the very least, LI has the potential to mature into a premier staffing/HR services firm.

As an aside, I think we are in a major bubble with regards to internet advertising. Companies are paying huge amounts of money get your eyes on their ads, but who actually pays attention to them? Most people my age use AdBlock or a similar plugin. Who just goes around clicking on banner ads/sponsored links?

 
West Coast rainmaker:
Alone, their valuation is crazy. Compared to Facebook at 55b, they're a bargain.

Like HarvardorBust said, it's not the number of users they have, but the kind of users they have. If you have a group that is 95% comprised of a specific demographic, it is far easier to monetize them. LinkedIn captured an uncommonly valuable demographic: young, motivated, working professionals.

What's more, LinkedIn is actually able to directly sell the information on these accounts through recruiter licenses. Having an actual product, in this case a database of users, is far more valuable than the targeted ads facebook can sell. At the very least, LI has the potential to mature into a premier staffing/HR services firm.

As an aside, I think we are in a major bubble with regards to internet advertising. Companies are paying huge amounts of money get your eyes on their ads, but who actually pays attention to them? Most people my age use AdBlock or a similar plugin. Who just goes around clicking on banner ads/sponsored links?

It depends on how targetted the ads are. On Facebook I actually have ads from McKinsey and the likes. I think such ads can get high response rates. That's why I think that Facebook is valuable.

 
West Coast rainmaker:
Like HarvardorBust said, it's not the number of users they have, but the kind of users they have.
? They have yet to monetize this

I'm not calling this a bubble yet, but I think LinkedIn is definitely taking advantage of a fad.

Get busy living
 

100% growth, profitable, and a huge market opportunity. My firm has started to pay for premium subscriptions for employees in HR, and it won't be long before they start allowing everyone in a front-office facing role to expense a premium membership. They haven't even begun to tap ad monetization, and hiring solutions are by far their fastest growing segment (and likely the largest addressable market). Not saying this is a top-notch buy, but I'd take LinkedIn over any of the other high-growth tech/social media companies any day of the week.

 

Monster World Wide, where as most of you will know it as www.monster.com have a market cap of 2B as of today. Linkedin can easily charge a significantly higher fee for job posting than Monster because their members are professionals and use the site for business purposes. Let's not forget about the data it collects as well, that is worth a lot of money in the advertising world.

a 3.5B valuation is not rich and I predict the stock will be up 20% within the first qtr post IPO.

 
ST Monkey:
Monster World Wide, where as most of you will know it as www.monster.com have a market cap of 2B as of today. Linkedin can easily charge a significantly higher fee for job posting than Monster because their members are professionals and use the site for business purposes. Let's not forget about the data it collects as well, that is worth a lot of money in the advertising world.

a 3.5B valuation is not rich and I predict the stock will be up 20% within the first qtr post IPO.

Difference between Monster and Linkedin: one user base consists of people without jobs, the other consists of people with jobs.

 
HarvardOrBust:
ST Monkey:
Monster World Wide, where as most of you will know it as www.monster.com have a market cap of 2B as of today. Linkedin can easily charge a significantly higher fee for job posting than Monster because their members are professionals and use the site for business purposes. Let's not forget about the data it collects as well, that is worth a lot of money in the advertising world.

a 3.5B valuation is not rich and I predict the stock will be up 20% within the first qtr post IPO.

Difference between Monster and Linkedin: one user base consists of people without jobs, the other consists of people with jobs.

hahaha
Get busy living
 

you guys are all noobs. i'm bookrunning this deal right now. Renren IPO'd at 77x revenue. given that fact, this is a very cheap stock valued only at $3.5 billion

multiples son. all about multiples.

 
FTPiper:
you guys are all noobs. i'm bookrunning this deal right now. Renren IPO'd at 77x revenue. given that fact, this is a very cheap stock valued only at $3.5 billion

multiples son. all about multiples.

Cheap!!! By what means dude? lol

 
FTPiper:
you guys are all noobs. i'm bookrunning this deal right now. Renren IPO'd at 77x revenue. given that fact, this is a very cheap stock valued only at $3.5 billion

multiples son. all about multiples.

You WERE bookrunning this deal. If anyone decides to report you for the host of SEC violations you committed by marketing an IPO without appropriate disclosures, etc, you'll be bookrunning an unemployment check. Probably not even that because you don't get unemployment when you're fired for cause.

 

I feel that anytime people use excuses to justify valuations such as "the business model has changed" or "they have a ton of users that they just to monetize" then I'm waving a huge red flag. It seems like a lot of the same BS that happened 10-15 years ago.

In buying at this valuation, you're placing a bet that the company can grow at insane rates. I'd much rather buy an established company like Microsoft at less than 10x earnings where there's no doubt. At 10x earnings you get a 10% earnings yield + 2.5% dividend + ~2% growth with inflation for a ~15% return.. seems much better to me.

 

Just a thought-- I tell Google more about myself than I would ever tell LinkedIn or Facebook combined. In an age where all we are is an IP address anyway, and consumers increasingly make purchasing decisions online, why would there be value-add in marketing data from LinkedIn? The best thing that ever happened to advertising was the invention of the cookie. Not the one you dip in milk, but the one that is trying to sell (right now on WSO) me a seersucker suit from Men's Warehouse so I can have something to rock to the weddings I must attend this summer. It knows what I want, what I like. Not because I tweeted it, friended it, liked it, or -insert past tense verb here-. Maybe I'm just cynical. I think the only thing social media has been good at is increasing the narcissistic nature of people.

But to the extent that LinkedIn could find someone out there willing to pay up for whatever meaningful data they could gather, will it or when would it pay off for the marketer? I look around on LinkedIn and seems like the higher ups I network with don't use it or have never heard of it, and I'm constantly getting invites from the eager sophomore at my university because he stalked me and found out where I interned. So if we are the future, when will we ever reach the point to be a more attractive guinea pig than your average facebooker or googler? Maybe we never will-- the drunken photos littered over the internet from our college years thanks to facebook will surely come back to haunt us and pull us down at some point won't they? And if they don't, will we forevermore need to hide from our professional counterparts who we really are by having a LinkedIn account for the weekdays and a Facebook account for the weekends? Or will we one day adopt the morals of a french prime minister candidate and simply stop giving a shit?

 

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