LinkedIn Experimenting With New Business Models

Includes: GOOG, MSFT, YHOO
by: Louis Rhéaume

LinkedIn is a social network firm planning a $175 million IPO soon in 2011, but the date is still not fixed. Like many social networks firms such as Twitter or Facebook, Linkedin promote the growth of its subscribers over profitability and revenues. They have now 90 millions members in 200 countries. The firm was founded in 2003 and is based in Mountain View, California. The firm is still experimenting with business models. In 2009, they made $120 million in revenues and a loss of $3.97 million. For the first nine months of 2010, LinkedIn made $161.4 million in revenues and a net income of $10.07 million.

In June 2010, Nielsen reported that social networking now eats up twice as much of our online time as any other activity. Sites like Facebook and Twitter now account for 22.7% of time spent on the web; the next closest activity is online games, which make up 10.2%.

For 2010 we do know the company has around $200 million in annual revenues. The rate of growth is 200% from a year ago. Applying a P/E ratio of 10X, would give a $2 billion valuation company, before the IPO. LinkedIn founder Reid Hoffman's 21.4% stake would worth around $430 million.

The demographics of the members of LinkedIn tend to be 35 + older, professional, and wealthy, which represent some of the best segment for advertisers. Like Twitter, LinkedIn advertising revenues are still very small: in Q3-2010, they were only $18 million. It is experimenting new sources of revenues with 45% of its revenues coming from selling tools to recruiters, and another 24% from selling subscriptions.

Facebook is now relying heavily on its Facebook credits for virtual goods (i.e. online game credits) and maybe coupons to increase profitability. Twitter's new business model will rely on charging for access to its full data stream. It will feature promoted tweets in search results and eventually other places and feature promoted trends in its trending topics. It will publicize sales and other deals, and offer pro accounts. Twitter is even considering inviting users to pay to promote their Twitter accounts. Promoted tweets would represent a Twitter-specific version of Google (NASDAQ:GOOG) AdWords. Thus, LinkedIn, Twitter and Facebook are still experimenting with new sources of revenues.

Positive points

  • Benefit from first-mover advantage in its niche.
  • Benefit from social network valuation momentum.
  • Interesting growth of revenues from recruiters’ tools: opportunities for business model fine tuning.
  • Social networking is addictive for many professionals.

Negative points

Investors who should analyze LinkedIn IPO have to take into considerations many risks related to an emerging Internet stock:

  • Not a proven business model.
  • Competition will increase in online professional social networking.
  • The firm has to invest massively in 2011 and it anticipates a loss.
  • The firm’s values rely mainly on members’ satisfaction before shareholders.
  • Vulnerable to hacker attacks.
  • The CEO had a relatively high salary in 2010 for a start-up: $462,297

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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