Based in Mountain View, California, LinkedIn (LNKD) is scheduling a $263 million IPO with a market capitalization of $3.12 billion at a price range mid-point of $33.50 for Thursday May 19, 2011. Our full IPO Calendar includes three others.
CONCLUSION -- LinkedIn appears to be expensive by standard valuation metrics on the IPO. But they may be able to grow into an expensive valuation if their "investments" -- which are expected to produce losses for the remainder of the year -- payoff with increased top line revenue and increased market share.
LNKD is increasing sales, marketing and other expenses to force a loss for 2011. S-1 page 18. There's always a risk that increased sales and marketing expenditures will not deliver hoped for increases in top line revenue and bottom line profit.
Therefore it seems prudent to watch LNKD in the immediate IPO after-market rather than entering "buy at the market" orders. A lot of the immediate IPO after-market buying probably will come from retail investors who may not have fully digested the S-1 filing, and may be surprised by the expected losses for the next three quarters
However, because of LNKD's grip on its market segment and fast recent growth in sales and web metrics, LNKD is expected to trade higher than the current price range mid-point of $33.50. Therefore, if LNKD can be obtained at the IPO price it looks like a good bet.
The Venture Capital firms of Sequoia Capital, Greylock Partners, and Bessemer Venture Partners will hold collectively over 40% of LNKD post-IPO. They are not selling on the on the IPO, which is a strong endorsement.
OVERVIEW -- LinkedIn is a very good company with an 82% gross margin and is committed to building its brand before generating profits, which is unusual for a company on the cusp of an IPO. LNKD's objective appears to be to dominant their target market before other heavy hitters up the competitive ante.
Most successful IPOs go into their IPO with good sequential growth in top line revenue and income. Not so with LNKD on the income front, by design.
SUMMARY -- LinkedIn seems to have cornered, at least for now, the professional networking market, with 102 million registered users as of March 31, 2011 in 200 countries, with 75 million unique visitors each month on average for the March 2011 quarter. In terms of financial metrics:
- Sales increased 100% for the year ended December 2010 compared to 2009.
- Comparing the March 2011 quarter to the December 2010 quarter sales increased 15% to $92 million
- For the March 2011 quarter operating margin decreased 84% to 1.4% and profits decreased 60% to $2.1 million.
- Income for the March quarter declined relative to the December 2010 quarter in large part due to an $8.7 million increase in sales and marketing expenses. S-1, page 58.
- And in the March quarter LinkedIn generated 49% of sales from its hiring solutions segment, which in effect is an online executive search solution.
LNKD is not a 100% online Internet-based company: Fifty four percent of LNKD's the March 2011 quarter revenue came from a ‘feet on the street' sales force; 46% of the March quarter's revenue is from online sales. S-1 page 49.
VALUATION -- Annualizing results for the March 2011 quarter, at the price range mid-point of $33.50:
- Price-to-sales ratio is 8.4;
- Price-to-earnings ratio is 377;
- Price to adjusted EBITDA ratio is 60; and
- EBITDA's % of revenue declined to 14% from 20% for the March 2011 quarter versus the March 2010 quarter.
REVENUE SOURCES -- For the March 2011 quarter revenue sources include:
- 49%: Hiring Solutions (talent searches), to facilitate employer searches for job candidates. Up 174% from the year earlier quarter. As of March 31, 2011, LNKD's hiring solutions were used by nearly 4,800 companies, including 73 of the Fortune 100. Customers also included many small- and medium-sized businesses using our platform to leverage their limited recruiting resources;
- 30%: Advertising, driven by page views and unique visitors. Up 95% from the year earlier quarter; and
- 21%: Premium subscriptions, to enhance searches and direct contact abilities. Up 47% from the year earlier quarter.
SEASONALITY -- As LNKD's revenue growth rate slows, it expects that the cyclicality and seasonality of hiring solutions to be weaker in the first quarter of the year due to budgetary cycles and sales of marketing solutions to be weaker in the third quarter of the year because Internet usage during the summer months generally slows.
DUAL CLASS STOCK -- The public's 7.8 million shares each have one vote per share. Insiders' 86.7 million shares each have 10 votes per share
COMPETITION -- There are three competitor segments.
(1) Members — Professional Networks.
- The market for online professional networks is new and rapidly evolving. Other companies such as Facebook, Google (GOOG), Microsoft (MSFT) and Twitter could develop competing solutions or partner with third parties to offer such products.
- LNKD also faces competition from a number of smaller companies in international markets, such as Xing in Germany and Viadeo in France, that provide online professional networking solutions, as well as Internet companies in the customer relationship management market, such as Salesforce.com (CRM) with Chatter and Jigsaw.
(2) Enterprises and Professional Organizations — Recruiting.
With respect to our hiring solutions, LNKD competes with established online recruiting companies, such as Monster+HotJobs and CareerBuilder, talent management companies, such as Taleo, and traditional recruiting firms.
(3) Enterprises and Professional Organizations — Advertising and Marketing.
LNKD competes with online and offline outlets that generate revenue from advertisers and marketers.
STOCKHOLDERS -- 5% or more stockholders include Sequoia Capital, Greylock Partners, and Bessemer Venture Partners who will hold collectively over 40% of LNKD post-IPO. None are selling on LNKD on the IPO, which is a strong endorsement.
USE OF PROCEEDS -- Shareholders intend to sell three millions shares. LNKD intends to sell 4.83 million shares to net $147 million. Proceeds are to be allocated for working capital and general corporate purposes, including further expansion of product development and field sales organizations, and for capital expenditures.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
