LinkedIn IPO: Upside Is Now Limited

May.18.11 | About: LinkedIn (LNKD)

LinkedIn (NYSE:LNKD) is the recognized leader in the “professional” networking segment. The company has over 100 million members in 200 countries and 75 million unique page views per month. (Both of these figures increased by 10 million in the past few months.) Membership has been growing rapidly and has been running at 1 million new members every 10 days.

The basic features of LinkedIn include free services like maintaining a professional “profile of record” and being able to network with colleagues and peers. Users also have access to premium services for a monthly fee, which accounts for 41% of revenue.

Companies now make up the bulk of revenue and are also growing the fastest. These services include hiring solutions (27% of revenue) and advertising/marketing (32% of revenue.) Over 3,900 companies are using LinkedIn for hiring and over 33,000 are doing direct advertising. Growth in hiring and marketing is 178% and 116% respectively versus 33% for individual premium services.[1]

LinkedIn was started and launched 2003. In September of 2004 they achieved their first revenue with marketing solutions. LinkedIn Jobs was launched in March of 2005. Premium subscriptions were offered in August of 2005. In March of 2008 the company launched Corporate Solutions.

LinkedIn would like to improve their viral marketing, build more business and career intelligence into the system, create a better and more mainstream API and offer more effective tools for the sharing of skills and insights.

The recent performance of the company has been strong, which allowed us to increase our estimates and Intrinsic Valuation (IV) from our last update. However, the large increase in the price range (from $32-35 to $42-45) puts most - if not all - of these improved prospects in the share price.

Positives, Neutrals and Negatives

+ The success of personal networking services like Facebook and Twitter has helped create a need for a “professional” version of these tools, and LinkedIn is the only meaningful platform for this purpose.

+ High revenue growth and rapidly expanding margins provide excellent returns on invested capital.

+ Is recognized as the de-facto professional networking tool and is effectively used by most as their professional profile of record and online resume.

+ Competition has been benign as consumer social networking players have avoided the business market and other business-focused companies have not yet offered any viable professional networking.

= So far the ability of the company to offer “professional insights” has been somewhat limited.

= The recent success of LinkedIn has more to do with being in the right place at the right time and driven more by Facebook and Twitter than anything LinkedIn has brought to market.

= Management is solid but uninspiring. The CEO is basically a VC with an Internet background from Yahoo. Our view on this didn’t evolve much after watching the roadshow presentation. Professional, sure; but inspired - not really.

= The company has expanded internationally but results have been mixed. Companies like Xing (in Germany) and Viadeo (in France) have done well in their local markets but could also be acquired.

- LinkedIn technology has lagged substantially and the company failed to capitalize on a variety of trends including blogging, micro-blogging, expert networks, and “connect” technology for using a LinkedIn profile more actively.

Stock and Valuation

Now that LinkedIn has filed an updated prospectus we have been able to update our Intrinsic Valuation (IV.) Besides adding the share count into our model, we increased our revenue projections but also increased some expense levels as well. On balance, the valuation has increased from 3 months ago based on the strong performance and now stands at $35 for 2011.

It’s worth noting that IV for 2012 expands to $40 and a “stretch” case drives a $50 IV for 2012. These numbers provide a yardstick to judge the attractiveness of LNKD shares in the aftermarket.

An analysis of comparable companies is useful but hampered a bit by the lack of a “direct comparable” company. Most of the other firms are really talent management and recruiting. We did incorporate some online advertising, marketing and B2B services firms to capture that facet of the company.

Management

  • Jeffrey Weiner, CEO since June 2009, was at Greylock and Accel Partners and Yahoo from 2001 to 2008.
  • Steven Sordello, CFO since 2007, was CFO of Tivo and Ask Jeeves.
  • Michael Gamson, Head of Sales since June 2008, was at Advent Software.
  • David Henke, Head of Operations since November 2009, was at Yahoo from 2005 to 2009 and AltaVista before that.

Conclusion

There’s never been a better time to be a social or professional networking company. LinkedIn has been capitalizing on the business opportunity and is doing the same in the capital markets. Investors would be wise to do their homework, however, and be price sensitive. The aftermarket performance of Renren (admittedly a Chinese company) suggests some patience might be rewarded.

LinkedIn is an expensive stock at the filing range. But their growth, positioning and financial performance in large part justifies it. Appreciation, however, depends on future execution, which has not really been inspired.

The broader questions for LinkedIn are what will they do differently as a public company to execute better? Will they be aggressive with acquisitions and what direction will they go in? International expansion (Xing or Viadeo)? Knowledge networks (Quora?) Their technology development has been well funded for some time and hasn’t produced great results. Will that improve post IPO?

Most fund managers and investors can be expected to want to own this one, which makes participating in the IPO a must and immediate purchases in the aftermarket possibly worth the effort depending on the price. If the shares are priced at or above the high end of the range things will have to go very well for investors to enjoy additional upside.


[1] Revenue percentages are based on full-year 2010 results.

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