Barron's
By Andrew Bary
Call it Bubble 2.0.
The wild reception for LinkedIn's initial public offering last week evoked the dot-com bubble of the late 1990s, when dozens of dubious Internet companies surged following their IPOs, often attaining multibillion-dollar market values, only to crash when they ran out of money or couldn't meet Wall Street's expectations.
By contrast, LinkedIn (ticker: LNKD) is a real business, with more than 100 million members in a kind of Facebook network for professionals. But it looks overvalued, after a jump from $45 at its IPO Wednesday to 93 at Friday's close.
The company now has a market value of $8.7 billion, based on 94 million shares outstanding—and that doesn't include another 30 million that may be issued to satisfy options and executive stock grants. The market value is equal to 35 times 2010 revenue of $243 million and almost 550 times 2010 profit of 17 cents a share. Google (GOOG) is valued at five times revenue and 20 times trailing earnings.
LinkedIn's revenue is growing sharply, with sales hitting $94 million in the first quarter, more than double the year-earlier total. It made just two cents in the first quarter and doesn't expect to be profitable this year, as it "invests for future growth."
LinkedIn appears to have a sustainable business model geared toward selling access to its member data to potential employers and advertisers, but its valuation looks steep, at more than 20 times possible 2011 revenues of $400 million.
The stock could easily be cut in half if the company stumbles. Less than a month ago, it was trading in the 30s in private markets, and in April employees got a wad of options at $22.59, then deemed to be the fair value. One factor driving the subsequent run-up: the thin IPO float of just 7.8 million shares.
LinkedIn defies conventional analysis because of minimal profits. It's essentially a bet that the company ultimately can supplant online job sites like Monster.com, and get advertisers to pay a lot to target its huge membership.
The deal creates another Internet billionaire in chairman Reid Hoffman. His 20% stake is worth $1.8 billion. The average price paid by existing holders, including many employees, is just $1 per share. Also to benefit, indirectly, from LinkedIn's dazzling debut, are the looming IPOs of Twitter, Groupon and Facebook.
LINKEDIN HAS GRAND, OR GRANDIOSE, ambitions. Its prospectus says, "Our vision is to create economic opportunity for every professional in the world," and that "we believe we are transforming the way people work by connecting talent with opportunity at massive scale." Members post profiles on the site, detailing as much professional and personal information as they care to disclose, which is available to other LinkedIn members as well as potential employers.
One key issue is whether LinkedIn is approaching saturation of its market. The company's 101 million members are roughly split 45/55 in the U.S. and outside the country. It boasts that it has been adding a million members every 10 days. Just looking at the U.S., there are 180 million adults between 21 and 65, including the unemployed and those out of the job market. This suggests that the firm, with its 45 million U.S. members, may be reaching most of the nation's professionals already.
Expenses could rise because the cost of attracting talent in Silicon Valley, where LinkedIn is based, has soared as companies compete for top engineers and programmers. LinkedIn now is at a disadvantage because start-ups can offer cheap, pre-IPO stock to new hires, while LinkedIn has to grant stock or options at current prices.
Monster Worldwide (MWW), which operates the leading online jobs site, has a market value of $1.9 billion, just 20% of LinkedIn—and Monster has $1 billion of annual revenue. It was a hot stock as recently as 2007, when it looked like a category killer, destroying the classified ad business. But at 15, Monster's shares are at a fraction of their '07 peak. Such a fate could befall LinkedIn, too.
So far, Facebook and other social networking sites haven't targeted professionals, but they could. And while LinkedIn has significant growth opportunities abroad, its international revenue is still just 27% of total sales.
A handful of the dot.com moonshots—like Amazon.com (AMZN) and eBay (EBAY)—have justified their initial hype. But most highfliers flame out, and the odds are long that LinkedIn can justify its huge market value. Investors probably should stay away.
