As a newly graduated Finance major heading towards a career in Business Technology, I find myself gravitating towards news that captures both of those interests. Naturally, the announcement of LinkedIn’s IPO, the first major IPO of a tech company since the recession, grabbed my attention.
Then came the news that LinkedIn would be offering their shares at the top end of their announced range, a stunning $45/share, or a valuation of $4.3 billion. This was the top end of a range that was already an increase of 30 percent over their earlier stated range of $32-35. Investors were clearly champing at the bit to get a piece of the social networking pie, even if it had to be the unglamorous LinkedIn.
Still, analysts were cautious, warning that we’d have to wait and see how LinkedIn actually performed in the secondary markets. To which LinkedIn responded by rocketing well over $80 by the time that I checked it on 10am of its first trading day. IPO underpricing is a well-known and well-documented phenomenon in the world of finance, but a one day underpricing of 110%? Maybe $4.3 billion wasn’t so high after all.
I’m not shouting “bubble” at the top of my lungs, but I’m looking at the same numbers as everyone else, and I can’t see how you justify it. LinkedIn is currently trading at a 1,200x P/E ratio. Which is at least 50x as high as any high growth tech company should be.
Here’s my problem: LinkedIn is an established product. This is not an early Amazon that just needs to reach scale to become lucrative. They have over 100 million users. They have an established freemium platform and ads to monetize their product. All of that is excellent business, but where is the growth to justify their multiple?
Do they plan on growing their user base? In the US, the most lucrative ad market, the population of the workforce is 130 million according to Wolfram|Alpha. Essentially, their user growth rate is tied to population growth unless they intend to become a major player in developing countries like China, not an easy task from a cultural standpoint (just ask Google, who still can’t compete with Baidu).
Which means to justify their $9 billion valuation they have to squeeze more money out of their current users. How much money? If we’re being generous, let’s say they can justify a Price/Sales of 10 (almost twice that of Google). Their current Price/Sales is 28.5. LinkedIn needs to triple the amount of revenue it gets from every user to even come close to a reasonable valuation. With an already monetized platform, I don’t see how that’s possible.
There is definitely opportunity for LinkedIn in this space: headhunting and jobs services, highly targeted marketing, etc. But I just don’t see how investors can expect them to triple the current revenue per user, even if they expand outside their current scope.
I just hope that investors calm down a bit before the next big internet IPO hits. If Groupon gets a ridiculously high valuation despite having an easily replicable business model, several competitors (see: LivingSocial), and a high cost of sales, we may be seeing the beginning of a bubble.