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LinkedIn IPO Is A Success, But Monetization Rate Is Far Too Low

Posted on Tuesday, May 31st 2011

The market is waiting for some big Internet IPOs to come out this year and next, with Facebook, Groupon, Twitter and the like expected to lead the brigade. However as it went to trade on the NYSE earlier this month, LinkedIn (NYSE:LNKD), the leading social network for professionals, became the first big U.S. social networking company to list. Its IPO is also being called the biggest Internet IPO since Google listed in 2004.

LinkedIn’s Financials
LinkedIn ended last year with revenues of $243 million, recording 102% growth over previous year’s $123 million. Net income grew 487% to $15.4 million compared with a loss of $4 million a year ago. Last year was LinkedIn’s most profitable year thus far. By segment, revenues from hiring solutions of $101.8 million accounted for 42% of their annual revenues. A third of its revenues came from marketing and at $61.9 million, 25% of revenues came from premium subscriptions. The company’s revenue mix has changed since last year when premium subscriptions accounted for 41% of its revenues and hiring services brought in 29% of revenues.

LinkedIn’s Strategy
LinkedIn is focused on creating  viral membership growth. It has more than 100 million members and is looking to increase this number through improved search engine optimization and by adding features that include integrating its platform with other applications and improving communications capabilities. As part of its platform development strategy, LinkedIn has already opened its platform to third party application development. It plans to continue to grow their developer community by making its products and services available via open application programming interfaces, or APIs, and embeddable widgets.

LinkedIn is also looking to expand internationally in the near future. It currently has operations out of Australia, Canada, India, Ireland, the Netherlands, and the United Kingdom and has seen significant growth in membership in these regions. For instance, since its U.K. office opened, membership in Europe has increased from 5 million to 16 million. It plans to expand sales, technical, and support operations in additional international locations and is targeting to increase the international member base by making its platform available in more languages and developing its brand across various countries. Last year, international revenues accounted for 20% of LinkedIn’s annual revenues. Some of the markets it seems to be evaluating are Brazil, Japan, and China.

LinkedIn’s IPO was priced at $45 a share and attracted over $350 million through sale of an 8% stake, or 7.8 million shares. Just a day before the offering, the company was looking at pricing the IPO at $10 less than the final price range of $42 to $45. However, by the end of the day it listed, the stock had more than doubled to $94.25, taking the company’s valuation to nearly $9 billion and translating to nearly 37 times revenue multiples. The stock is trading at $88.32 with a market capitalization of $8.35 billion.

LinkedIn may have managed to reap the first mover advantage in the Internet IPO market; however, I am still wary of its lofty valuations.

LinkedIn began its operations in 2003 and yet is not able to monetize its massive user base sufficiently. It makes me question the close to $9 billion valuation.

Some of you have read my recent roundtable recap raising the question: Twitter, LinkedIn – Why Not Affiliates? It’s a serious question that LinkedIn should visit and revisit over the upcoming quarters as the stock price experiences the inevitable correction.

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The saddest part is that the valuation LinkedIn has notched up is partly due to a clutch of investment bankers (which is what they are paid for!) of Wall St. who in my view, botched up the listing price and pocketed the spoils through that wildly speculative first day of trading. Interestingly and ironically(and these are still simplistic observations), the sense that there is a bubble lurking somewhere is accentuated on two counts. In fact there are two bubbles here: One is an investment/valuation bubble and the other one is a performance bubble!

1. The Bankers pushing the listing at a price lower than what the market (read speculators) was ready to pay thereby resulting in less money in the coffers that probably LinkedIn could use for a bigger and more ambitious expansion to effect better monetization.

2. Assuming that the Bankers had priced the listing closer to what the market was willing to pay and LinkedIn did get a bigger chunk of money, are the company and its user base monetization models geared enough to produce the right results.

Otherwise, we are all left to assume that social media company valuations are just about garnering a huge user base (pretty much like the last time we had internet companies attracting fancy valuations on the basis of just eyeballs).

Manoj Nair Sunday, June 5, 2011 at 8:47 PM PT