LinkedIn Corp. (LNKD) finally IPOed to much hype and hoopla. It rocketed to $94.25 on its first day of trading from an opening price of around $83.00. May 20th saw it open higher still, but eventually it settled at $93.09. This gave LinkedIn an equity valuation around $8.8 billion based on approximately 94.5 million shares outstanding. Given its current success, speculation is now running wild about the value of Facebook. Some recent estimates put it at upwards of $80 billion or even $100 billion. Perhaps it is a not good time now to be caught up in the euphoria.
Comparing LinkedIn and Apple
Commentators, bloggers, and pundits are all speculating on justifications for LinkedIn's valuation and the implications for Facebook. However, I suspect attempting to divine a valuation for LinkedIn based on financial statements is a waste of time. There is not really any free cash flow and 2010 net income was just $15 million, offering a P/E just a shade under 600x. Reed Hastings might be happy now since Netflix, Inc. (NFLX) looks like a screaming bargain with a tiny P/E around 70x. Apple Inc. (AAPL) trades at an embarrassingly low 16x.
|Company||Share Price ($)||Equity Value ($B)||Cash ($B)||Enterprise Value ($B)|
Source: Yahoo!Finance, LNKD S-1 filings
Dusting Off Older Valuation Methodologies
Given the paucity of truly useful financial data, it is time to resurrect some older valuation methodologies from the internet boom. One of the classic metrics was value per user. I pulled an article from 1998 that had WebDex pegging Yahoo's value per user at $115. At this time Yahoo's (YHOO) market capitalization was about $3.2 billion. LinkedIn has 102 million members which would imply about a $11.7 billion market capitalization. However, that same article cited that Yahoo carried a premium valuation, suggesting a group average around $60 per user. This would drop LinkedIn's value to just $6.1 billion - still pretty good. There are two potential tensions here, however:
LinkedIn has a model to earn revenue from users, perhaps justifying a higher valuation rate
There are vastly more distractions on the internet to consume people, justifying a lower valuation per user.
Pageview Valuation shows LinkedIn Fairly Valued using 1999 Metrics
Oddly enough, these old internet metrics are not so bad for valuing LinkedIn. I also looked at market capitalization per page view. LinkedIn ran at an annualized 28.4 billion page views in Q1 2011. Yahoo issued a press release for Q3 1998 results, giving it 144 million page views per day or about 52.6 billion per year. At the time, Yahoo had a market capitalization of around $12.8 billion. The following chart compares these per-pageview valuations with a few other data points for Yahoo.
|Ticker||Annualized Pageviews (B per year)||Equity Market Cap ($B)||Value per Pageview|
|YHOO circa September 1998||52.6||12.8||$0.24|
|LNKD circa May 2011||28.4||8.8||$0.31|
|YHOO circa September 1999||140.5||47.2||$0.34|
|YHOO circa March 2000||228.1||97.2||$0.43|
Source: Yahoo!Finance, Yahoo earnings press releases, Yahoo 10-Q filings, LNKD S-1 filings, Author Calculations
Again, it should be noted that LNKD has a business model to directly generate revenue from users, unlike Yahoo back in the day. Perhaps this also suggests that LinkedIn has maybe 35-40% (an increase from $0.31 to $0.43) upside before it starts a slow decline. It should be noted that LinkedIn pageviews will probably also increase, creating still more upside.
Network Effect Valuations put Facebook's Value even Higher
Metcalfe's Law postulates the value of a telecommunications network is proportional to the square of the number of users. Applying this notion to social media on the internet suggests that Facebook should be worth about 36 times what LinkedIn is worth, since it has about 6 times the users. LinkedIn's S-1 cites 102 million registered members. Facebook advertised 500 million users back in summer of 2010 so I just added another 20% to that figure for my estimate.
|Stock||Users (100 million)(N)||N^2||Enterprise Value Estimated($B)||Equity Value Estimated ($B)|
Source: Author estimates, LNKD S-1. Note that 294.1 = 36/1.04 x 8.5
The first and obvious comment is, why should this make any sense anyways? The notion of Metcalfe's law is that the value of the network is proportional to the square of the users. This draws in people, and hopefully through clever business models, the company can capture that value. In this case, I would wager that Facebook is a lot more sticky than LinkedIn and pulls in more people for longer periods. Simply applying the ratio to just users would suggest that Facebook is worth $52.8 billion. However, I would argue it is worth more for the previously mentioned notion of stickiness; perhaps that is worth a 45% premium to get to the $80 billion valuation noted in the beginning. Also, the $52.8 billion is consistent with the price that Goldman Sachs (GS) paid for its stake ($50 billion) earlier this year.
The next note is that the Metcalfe's Law Valuation approach puts Facebook's Enterprise Value higher than Apple's (AAPL) based upon LinkedIn's current valuation. The equity value is comparable between Facebook and Apple. Does this make any sense whatsoever? In my opinion, absolutely not. However, at the rate that Facebook's valuation is climbing, it might be the only plausible methodology to use.
So what should an investor do with this information, besides wishing they had invested in these companies much earlier, which probably would have required being 1. very connected or 2. an employee, or 3. a venture capitalist or 4. willing to pay the secondary market price?
The internet has created incredible increases in efficiency and an equal amount of time-sucking distractions. (Perhaps these ultimately offset?) I suspect that most current users could not even comprehend not having access to a constant stream of information and connectivity. While the current crop of internet companies might offer more compelling business models and more addictive content, the fact that I can readily dust off some of the valuation methodologies from the Internet Boom and triangulate into LinkedIn's current valuation, should probably give investors pause to consider what might come next. I think I'll pass on buying any LinkedIn stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.