'LinkedIn Has the Highest Price-Revenue Ratio of Any Stock Anywhere'

LinkedIn stock is now trading above $100. Three days ago, it anticipated going public at $32 per share. On Thursday, the stock doubled before the afternoon and finished the day with the highest price as a percentage of earnings of any non-financial company. What does this means for social media wave, rumors of a tech bubble, and LinkedIn itself?

To learn more I spoke with Espen Robak, president of Pluris Valuation Advisors. As Robak explained his firm to me: "We're not bankers or consultants. Our job is to value private companies." This is an edited transcript.

DEREK THOMPSON: LinkedIn makes $12 million in profit a year. Investors are treating it like a $9 billion company. Is Wall Street insane?ESPEN ROBAK: It's not our job to make bears or bullish calls. But from a fundamental valuation standpoint, this looks like an incredibly rich -- unusually rich -- valuation, even by tech company standards. It really reminds me a lot of the late 1990s.  It's a tremendous win for the guys who bought the IPO. But it's not so great for the company, if it turns out they sold their stock at too low a price.

Who's winning and losing in these early rounds of trading?

The safest bet in social media? "LinkedIn sells straight to businesses. It's not teenagers playing games."

LinkedIn is the first of the big social media companies [Facebook, Twitter, GroupOn, Zynga, etc] to go public. What does this IPO mean for those companies?

It's sensationally good news for Facebook and those firms. Facebook in particular is a more attractive buy because it's so much bigger and there's so much more dominance in its market. I have to think that demand for Facebook's stock just exploded in the secondary market.

What is the secondary market, and why is it important?

There is a secondary market for a private company's stock before it goes public. Think of an e-Bay for illiquid securities, like private company stock. It's important because you see a lot of companies postponing going public partly because they've been able to get liquidity in these secondary markets.

Even before trading began, some analysts said LinkedIn was wildly overpriced. Then its stock doubled. How should we think about this?

LinkedIn's stock is consistent with a $9 billion valuation. [Ed: As John Cassidy explains, that estimation comes from taking the market price and applying it to the rest of the company's common shares, which haven't been issued yet.] LinkedIn has the highest price-revenue ratio of any stock anywhere.

What should we be watching for in the next few years to justify this price?

Sooner or later, companies mature, and they end up at mundane price-earnings ratios. The way to think about ratios and multiples for these kinds of companies is to think about Google. It's a hot stock, but it's trading at maybe 14 times its forward earnings. So the question we should be asking is: How much growth is LinkedIn going to have before they end up looking like Google? In order to justify trading at 25-times earnings, you have to get to some pretty good profit margins soon.

In LinkedIn's defense, the "hiring solutions" market is enormous. One analyst pegged it at $30 billion, which makes it bigger than the U.S. beer industry, for example. That implies lots of room for growth.

That $30 billion figure includes a lot of recruiting companies that are highly trusted and aren't going anywhere. I don' t know what kind of market share LinkedIn can realistically take.

Is this a bubble?

That has to be a concern. We're going into a period again where companies are trading at enormous multiples. There's a flood of IPOs and a substantial market correction is possible. But we're clearly not there yet. In fact right now, I think a little more of a bubble would be a relief for the economy.

Is there something behind all this froth in the stock market, like monetary policy or a shift away from buying risky sovereign debt?

I don't think it's monetary policy. I think these are attractive investments because social media is a great story and a tremendously fast growing market. LinkedIn's revenue model is service-based. It's not teenagers playing games, or clicking on pictures, or tweeting. It sells straight to businesses. If you're an investor looking for a sustainable business model in social media, it could well be LinkedIn.

Presented by

Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

The Case for Napping at Work

Most Americans don't get enough sleep. More and more employers are trying to help address that.

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register.

blog comments powered by Disqus


The Case for Napping at Work

Most Americans don't get enough sleep. More and more employers are trying to help address that.


A Four-Dimensional Tour of Boston

In this groundbreaking video, time moves at multiple speeds within a single frame.


Who Made Pop Music So Repetitive? You Did.

If pop music is too homogenous, that's because listeners want it that way.


Playing An Actual Keyboard Cat

A music video transforms food, pets, and objects into extraordinary instruments.


Stunning GoPro Footage of a Wildfire

In the field with America’s elite Native American firefighting crew


The Man Who Built a Forest Larger Than Central Park

Since 1979, he has planted more than 1,300 acres of trees.

More in Business

Just In