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LinkedIn’s IPO Will Usher In New Crop Of Internet Stocks

Posted on Tuesday, Mar 1st 2011

The social networking trend has become a mainstream practice courtesy of Facebook. While Facebook has yet to go public, LinkedIn, which is positioned as the leading social network for professionals, recently announced plans to go public this year. It will become the first social network to do so. It is also one of the first in a series of Internet IPOs expected to follow over the next year or two, products of a wave of innovation that was set in motion after the dot-com crash. All of the companies involved are taking advantage of the social behavior now prevalent on the Web. In 2003, when LinkedIn was founded, such behavior was not mainstream, and it took several years for the trend to catch on. But now, the results speak for themselves.

Founded in 2003, LinkedIn is a social network for professionals that has 90 million users in 200 countries. Users post their profiles and resumes and use the platform to connect with other professionals.

Byrne Hobart on Business Insider discusses LinkedIn’s competitive advantages. He says:

“Two of the strongest monopolies online are search engines and social networks. LinkedIn has solved both problems: for many users, it’s a second social network and a second search engine. In both cases, LinkedIn isn’t competing with the dominant companies in the industry, because it’s targeting a very narrow use case. In search terms, LinkedIn is the ideal tool for finding job candidates with a very specific set of skills.

As a social network, LinkedIn has positioned itself as the place for things you’re willing to brag about, which are not fun. They aren’t competing head-to-head with Facebook or Twitter. Instead, they’re absorbing the content that’s too boring for either.”

That sums up LinkedIn’s strategy and unique selling proposition (USP) quite well. LinkedIn is not as big as Google or Facebook, but it is a combination of two of the biggest trends in recent times: search and social network. Let’s now look at its financials and main sources of revenue.

LinkedIn’s Financials
On January 27, LinkedIn filed for an IPO and provided its financials. The company said in its filing that it planned to raise a maximum of $175 million in its IPO and will use the funds to expand internationally, build its infrastructure, and hire more people. It currently has 990 employees.

LinkedIn’s net revenue was $120 million and net loss was $3.97 million in 2009. In the nine months ended September 30, 2010, LinkedIn’s net revenue was $161.4 million and net income was $1.85 million. As of September 30, 2010, LinkedIn had $89.6 million in cash. Last year, it acquired B2B review specialist ChoiceVendor for $3.9 million and recommendation software maker mSpoke for $560,000.

Breaking down revenue by source, revenue from hiring solutions was $65.9 million or 41% of  revenue; marketing was $51.4 million or 32% of revenue; and premium subscriptions was $44.1 million or 27% of revenue. Net revenue from LinkedIn’s hiring solutions products increased $42.2 million, or 178% from 2009 to 2010, making search professionals the company’s most prolific customers.

Hiring solutions and marketing are LinkedIn’s main sources of revenue, and both are high-margin businesses that have seen continuous growth. On the other hand, premium subscriptions were a strong source of revenue in the early years, but growth has since slowed.

While 2010 was the first year in which LinkedIn became profitable, the company says it does not expect to be profitable on a GAAP basis in 2011. It also expects its growth rate to decline.

LinkedIn in its filing cited Facebook, Google, Microsoft, Twitter, and, via Jigsaw, as companies that could develop professional networks.

Facebook has whetted investors’ appetite in the sector. Facebook, the leading social networking site with over 500 million users, recently raised $1.5 billion in funding in a deal that valued the company at $50 billion. Facebook had $1.2 billion in revenue in the first nine months of 2010 and $355 million in profit.

Nadia Damouni and Alexei Oreskovic on Reuters report that LinkedIn announced its IPO plans a day after public Internet company Demand Media saw its shares surge about 33% in its first day of trading. Groupon is also considering an IPO this year, while Facebook said it planned to publicly disclose its financials by April 2012, a move which analysts hope will lead to an IPO. By then, there should be more visibility into the sector thanks to LinkedIn’s filing.

Other IPO possibilities are Twitter, gaming website Zynga, and peer-to-peer voice communication site Skype.

Yesterday, reports trickled in about JPMorgan’s investment in a fund that has bought about $400 million in Twitter’s shares. This investment values Twitter at about $4.5 billion. JPMorgan recently said in a regulatory filing that it is raising $1.22 billion in a venture capital fund.

Zynga, which has about 300 million users, mostly from Facebook, for its games like FarmVille, is in no hurry to go public because its founder wishes to have more control of the company. It has received $360 million in funding rounds from various sources, including DST Global, the Russian firm that has invested extensively in Facebook. According to Forbes, Zynga has been valued at $7 billion in talks with investors to raise more than $250 million.

These IPOs are an entirely different breed from the fragile dot-com stocks that famously crashed the market. They have real customers, real revenues, and real profits. In other words, they may be expensive, but they are not smoke and mirrors. They are real companies with real business models, although Twitter has yet to fully establish what its model will be and LinkedIn is still not hugely profitable. The rest have their fundamentals quite cleanly explained and have demonstrated a reasonably high degree of viability. Of course, some of the hype will fade over time, and the stocks will have their ups and downs as the more clinical eye of the public market reveals the details of monetization for broader consumption.

At any rate, these IPOs are a welcome force that underscores the immense potential of building highly scalable and global Internet companies at unprecedented growth rates. This is a trend that is here to stay, and because of the social Web, I believe it will get increasingly easy to build high-growth Internet companies during this decade.

Just to give you some statistics, LinkedIn had 81,000 users in 2003, 1.6 million in 2004; 4 million in 2005; 8 million in 2006; 15 million in 2007; 33 million in 2008; 50 million in 2009; and 90 million users in 2010. Zynga, founded in 2007, went to 8.6 million users in a week, 23.9 million users in 2008, 100 million users in 2009, and 300 million users in 2010. Zynga has taken advantage of the social Web that Facebook created. There will be other companies coming into play that will take similar advantage of the social Web infrastructure created by prior generations and scale faster and faster. This is definitely going to be an exciting decade for Internet businesses.

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Looking forward to seeing the staying power of these new crop of internet IPOs. What sort of staying power do they have for long term investors? Or are these stocks merely best suited for short plays?

hellbententrepreneur Tuesday, March 1, 2011 at 8:05 AM PT

I think they are long investments. I am very optimistic about the immense scalability of businesses whose primary value proposition is digital, and have the viral adoption patterns that these do.

Sramana Mitra Tuesday, March 1, 2011 at 12:40 PM PT