LinkedIn IPO Inspires Cheers, Fears of Tech Bubble 2.0

More

Is LinkedIn the online leader in a $30 billion and growing industry, or the most overpriced stock in America? It's both.

linknedin.png

The public offering of LinkedIn, the business social network, means the first of the social media wunderkinds are out of the kiddie pool and into the New York Stock Exchange. LinkedIn's $45* [see Update at bottom] share price puts its valuation above $4 billion, a staggeringly high number for a company with $16 million in profit over the last four quarters.

Before we listen in to the chorus of skeptics, let's take a looked at LinkedIn's business model and learn why early investors are so hot for the company.

First, the basics. LinkedIn has been called the professional's Facebook. If Mark Zuckerberg's online yearbook-turned-global e-salon is all about staying connected for fun, Reid Hoffman's resume warehouse-turned-international career fair is all about staying connected for work. The company boasts 100 million users, half of which are outside the United States, and it's growing rapidly. In November, the company claimed it was adding a user every second. Annual revenue has basically doubled every year for the last four years.

LinkedIn's revenue by product (graph via Business Insider) breaks down into three categories. Premium subscriptions are power users paying to see expanded profiles of potential hires and a complete list of users who've searched their own profiles, among other features. Marketing solutions include targeted Web ads from firms hungry for talent. Within hiring solutions, the largest category of revenue, LinkedIn offers premium search filters, matching talent and companies.

chart-of-the-day-linkedin-revenue-may-2011.jpg

BUBBLE 2.0?

That LinkedIn is actually earning a profit immediately distinguishes it from the paper tigers that burst into flames in 2000. Last quarter, the company notched $2.1 million in earnings on $93.9 million in revenue. When Pets.com uttered its last bark, the company was losing $21 million a quarter on $9 million in revenue. We can safely conclude that LinkedIn.com is not Pets.com.

Then again, being warmer than an ice cube doesn't make you hot. The statistics -- even for a young, fast-growth company -- are worrying. LinkedIn's price-to-earnings ratio (that's price per share over profit per share) is 275. The market average is 15. Its price-to-sales ratio (that's price per share over revenue per share) is about 14. How high is that number? Let's put it this way: Smart Money's Jack Hough calculates that the only large, non-financial company with a stock price that much greater than its sales is a pharma firm with a drug that doubles the cure rate of hepatitis C. In other words, LinkedIn has quite a bit to grow before it fills out a $45 share price.

So what does LinkedIn have that's worth investing in? It's all about the social network effect. Membership and corporate customers have both doubled since 2009. As the LinkedIn network grows, it becomes more valuable to both members and corporate customers precisely because it has more members and corporate customers for networking and hiring. An anonymous investor at Business Insider estimates that the market for "hiring solutions" is around $30 billion. I have no way to value that estimation. But if it's correct, that means it's three times the size of the U.S. coffee industry and larger than the U.S. beer industry. The online market leader in that space is destined to gobble up a lot of revenue as it achieves network dominance.

To rephrase this analysis as a marketing pitch, one argument says: "Buy LinkedIn: the online leader in a $30 billion and growing industry." The other argument says: "Buy LinkedIn: the most overpriced stock in America." The funny thing is, they're both true today. The not-so-funny thing is, we don't know which one will be wrong tomorrow.
____

Update: Wow. "LinkedIn shares skyrocketed more than 80% to trade at about $86 a share, and at a high of $92.99 a share, on Thursday as the social networking site launched its initial public offering." [LAT]

Jump to comments
Presented by

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

Get Today's Top Stories in Your Inbox (preview)

What's the Number One Thing We Could Do to Improve City Life?

A group of journalists, professors, and non-profit leaders predict the future of livable, walkable cities


Elsewhere on the web

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

Video

Adventures in Legal Weed

Colorado is now well into its first year as the first state to legalize recreational marijuana. How's it going? James Hamblin visits Aspen.

Video

What Makes a Story Great?

The storytellers behind House of CardsandThis American Life reflect on the creative process.

Video

Tracing Sriracha's Origin to Thailand

Ever wonder how the wildly popular hot sauce got its name? It all started in Si Racha.

Video

Where Confiscated Wildlife Ends Up

A government facility outside of Denver houses more than a million products of the illegal wildlife trade, from tigers and bears to bald eagles.

Video

Is Wine Healthy?

James Hamblin prepares to impress his date with knowledge about the health benefits of wine.

Video

The World's Largest Balloon Festival

Nine days, more than 700 balloons, and a whole lot of hot air

Writers

Up
Down

More in Business

Just In