January 18, 2011 | In: Technology

The LinkedIn IPO – How Much Is LinkedIn Really Worth?

We currently live in an age of IPO fiesta when it comes to social websites. Everyone wants to go public, some even want to go public without really going public. Who cares if the company is making money or not, or if the company needs the money or not, or if there is a potential of growth with that new, fresh money or not? It seems, at least for these social websites, that going public is the goal, and not the means…

Now let’s go back to the LinkedIn IPO, let’s examine what this website is, and how much it’s really worth.

What is LinkedIn

LinkedIn is a professional social website, similar to FaceBook, but without the casual part. You don’t have friends on LinkedIn, you have connections… Ideally, these connections will help you enhance your career (and they expect the same from you as well). LinkedIn has your professional profile, containing your job history, and listing your connections, and highlighting your skills and ambitions. A lot of companies nowadays check your LinkedIn profile before giving you the first call. Needless to say, the traffic and the quality of people listed on LinkedIn is much better than that of Facebook. You won’t see kids on LinkedIn, they have nothing to do there.

Who created LinkedIn

LinkedIn was created by Reid Hoffman back in December of 2002, making the website older than Facebook.

Is LinkedIn Profitable

Yes, it currently is. In fact, LinkedIn has been profitable since March 2006. The company makes money either through Google Adsense, or through people upgrading their profile to a premium account (which can be very, very costly for very limited gains in functionality).

How easy is it to make a LinkedIn clone?

As a person with a programming background, I can say it’s very easy to reproduce LinkedIn, much easier than FaceBook. But that’s really nothing, even if the website is easily cloned, it doesn’t mean that the website can no longer have an intrinsic value. The LinkedIn value lies in the trust that companies have in this website.

Now let’s go back to the original question, according to the current market, how much can LinkedIn be worth?

Let’s compare it to FaceBook…

FaceBook has currently about 600 million subscribers, with a huge chunk consisting of kids and other non-professionals. Let’s assume that this chunk constitutes about 50% of the total Facebook profiles (it can be more). Now according to the latest evaluation, Facebook (or Goldman Sachs) thinks it’s worth $50 billion, a number that values the company at 25 P/E (Facebook claims to have made $2 billion last year, mainly through all the Zynga trash and other let’s say shadowy, if not scammy ads).

Now LinkedIn currently has 90 million users, which is 15% of the current Facebook users. The difference between the number of users is well reflected in both websites’ traffic (it is worthy to note that LinkedIn does not seem to experience the same exponential increase of traffic that Facebook has month over month, and year over year):

Facebook vs. LinkedIn (until December 2010) – Courtesy of Compete.com

We learn from the above chart that LinkedIn has around 10% of Facebook’s traffic, and contrary to the unstoppable growth of Facebook, its traffic seems to be steady, with a slight increase month over month.

Now another factor that plays into assessing LinkedIn is how much the company is currently making, which is not public knowledge, but seems to be about $40 million/year, or about 2% of Facebook’s revenue. Assuming that LinkedIn should be valued at around 25 P/E (same as Facebook), the value of LinkedIn should be a billion dollars. But, traffic should be taken into consideration, as it seems that LinkedIn is not monetizing its traffic properly. And since LinkedIn’s traffic is about 10% of Facebook’s traffic, and by ignoring the 50% non-money making traffic that Facebook has, then LinkedIn’s real traffic, with respect to Facebook, should be around 20%. Does that mean that LinkedIn should be worth $10 billion? Certainly not!

I think the real value of LinkedIn should be somewhere in between the $10 billion (based on traffic) and the $1 billion (based on actual revenue), and leaning towards the $1 billion. $3 to $5 billion should be fair for such a company, provided they’re able to sustain the growth for 2011, and provided they can change their business model to make more money, which I doubt they will.

I believe that LinkedIn has no reason whatsoever to be public, and it doesn’t offer any value for the investor, as there is little growth potential with this current business model (which will never change).

Note: I have ignored the number of users for the sake of traffic, which is a much better metric, in my opinion.

3 Responses to The LinkedIn IPO – How Much Is LinkedIn Really Worth?

Avatar

Investing in Social Networks: Is It a Good Invesment? « Fadi El-Eter

January 22nd, 2011 at 5:26 pm

[...] not a long term investment. There may be a Groupon IPO (or not, if Google really bought Groupon), a LinkedIn IPO, a Twitter IPO, and a Facebook IPO by the end of the year. But will Groupon, LinkedIn, Twitter, or [...]

Avatar

If LinkedIn Is Worth $10 Billion, then How Much Is Facebook Worth? « Fadi El-Eter

May 20th, 2011 at 3:10 pm

[...] have written about the LinkedIn IPO before, and I estimated that LinkedIn is worth anything between $1 billion and $10 billion. I also [...]

Avatar

Is LNKD a Buy? « Fadi El-Eter

June 26th, 2011 at 9:23 pm

[...] have discussed LinkedIn (NYSE:LNKD) a couple of times before: the first time it was before the IPO, and the second time on May 20th, the same day of the [...]

Comment Form