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That will give the company an initial valuation of $4.2 billion and allow them to raise over $400 million.Is the company worth it?
Most of us have a LinkedIn profile but don’t subscribe to their premium services or click on any of the ads on the site (if we go there at all). Therefore, many have taken shots at the company and said that investors’ appetites are yet another sign of a bubble.
Yet, digging into LinkedIn’s financials, you can see that the company is on track to do $400 million in revenues this year, which would be a big jump over 2010’s $243 million. That means, at the high end of the range, LinkedIn will have a 10x price-to-forward-sales valuation. That isn’t outrageously expensive for a high-growth web company – even one that’s not Chinese.
The company has been steadily adding registered members, unique visitors, and page views in the last 3 years.
At the end of 2010, there were 90 million LinkedIn members, up from 55 million in 2009.
The biggest thing that LinkedIn has going for it is that it’s found a niche for which it is unquestionably the king: online professional profiles. When you want to find out something about a person, the chances are high that you’ll read their LinkedIn profile first when you search them. That’s an incredibly powerful starting point.
It’s hard to see that Facebook or Google (GOOG) or anyone else is going to knock off LinkedIn for that purpose. So, their supremacy in that niche should only strengthen over time.
Now, as a public company, with their stock to use as currency, LinkedIn should be in a better position to start making acquisitions tied to job placements and job management that spoke off from their dominance in profiles. They should seek more corporate clients over time.
LinkedIn will be bigger (initially) than some of their job placement and job management competitors including Monster (MWW), Taleo (TLEO) and SuccessFactors (SFSF).
But there are risks including:
- Many others are starting to come after this niche, including Salesforce (CRM) with their Chatter product and Twitter and Facebook could always try to professionalize part of their service.
- China has recently blocked LinkedIn, to allow internal competitive services to develop.
- The actual number of LinkedIn users is likely much smaller than the 90 million advertised members.
- Profitability really took a hit in the last year as LinkedIn more than doubled its spending on sales and marketing, product development, and general and administration. That wiped out most of their operating income, which was only running at 8% in 2010. This lack of profitability speaks to the biggest problem for the company which is the lack (so far) of a killer central way they make money. Most use it for free.
LinkedIn will try to address this weakness by continuing to grow based on the free service that people find useful. With this extra capital from the IPO, they will now be able to make some acquisitions (if they want) of higher margin companies that are related to them in the value chain. If they keep being a central hub in this value chain, there is good reason to think that they can find a better way to monetize that down the road.
But investors reading this are interested in knowing if they should buy LinkedIn in the minutes after the stock starts trading at $47, or $43, or $60.
In today’s jittery environment, I would say touching LinkedIn above $25 is a big gamble. There are always reasons the stock could trade up and people could buy into the long-term story ignoring the next few quarters’ challenges. However, investors were more forgiving 3 weeks ago than they are today.
[At the time of publication, Jackson had no positions in the stocks mentioned.]
Please follow me on Twitter: @ericjackson
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source: forbes.com
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