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LinkedIn Goes Public: Reviewing the Valuation

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Today, I was getting set to post the links I liked over the past week when I got into an email conversation with The Money Writers, the blogging network that I am proud to be associated with. The conversation went in several directions. One of those directions was the view of Brip Blap on the LinkedIn valuation.

In Silicon Valley, one of the biggest news items is the LinkedIn IPO. It was the biggest IPO since Google in 2004. I have to pause a bit and think about that. In the last 7 years (roughly) the biggest IPO in America is LinkedIn? That's can't be right, can it? Around the years 1996-2000 so many companies had IPOs that the craze was, "How do I get in on those IPO companies?" Am I the only person who Rip Van Winkle'd 7 years?

Anyway, back to LinkedIn's valuation and the conversation with Brip Blap.

In that conversation, Steve made a point about the large market capitalization of LinkedIn - 8.7 billion. I put bolded "large", because was a key point that he mentioned. I immediately questioned this because... well, in 1999 I was part of a technology company that had an IPO that was above of 4 billion dollars. In my mind, 8.7 billion is chump change for "the biggest IPO in about 7 years." (Again, this reflects how little I follow the IPO markets.)

I did a quick Internet search and found a site that suggested that mid-cap stocks have a market capitalization between 2 and 10 billion dollars. So I asked Steve again, "What makes LinkedIn a large company?" He pointed to a great article on Mashable: LinkedIn Is Now Worth More Than These 13 Household Names. I want to give credit to Steve. He knows his stuff and showed it. I'm not one to argue with a great site like Mashable - they are usually dead-on. However, I had to look it up to reconcile the differences.

I recommend that you open up the Mashable article in another window or tab to follow along. (When we were discussing LinkedIn, it's capitalization was at 8.7 billion a drop from when the Mashable was published. However, LinkedIn got a boost in last the couple of hours of trading and closed at over $95 - a market capitalization of over 9 billion dollars.)

Mashable made a point that LinkedIn is "Worth More Than These 13 Household Names." Here is an extremely snarky look at some of those 13 household names:

  • JCPenney - This company is still in business? If it weren't for them buying links and getting smacked down by Google, I wouldn't have heard of them in the last 5 years... maybe longer. JCPenney is like Sears, thought at least I know where those are... and Craftsman products differentiate them. For those New Englanders out there, I'm tempted to make a comparison of JCPenney to Jordan Marsh or Filene's.
  • MolsonCoors - I should invest right away. I think it is a better deal than LinkedIn. This conglomerate has many brands that are stronger than the average person thinks. However, their growth is going to be limited like any consumable that has been around for years.
  • United Continental Holdings (World’s largest airline) - Oooh, an airline. Let me jump on investing in airlines because they are fantastically profitable. (Is that snarky enough?)
  • Tiffany & Co. - In this economy? Really? I might as well invest in gold-plated buggy whips. It's not surprising that it might not be doing well.
  • Red Hat - This is an awesome household name. I had a conversation with my mother the other day, I said, "Mom, I'm worried that you don't have enough red hats in your home." I'm sure that most families have had the same conversations in their households about Red Hat. Here's an additional thought: They give their product away for free (though they charge for support).
  • Sirius XM - Weren't both Sirius and XM essentially penny stocks a couple of years ago? I used Google Finance to put graph a 100 day moving average and it was below $2 in most of 2004. It hit a peak around 2006 around $6 and then steadily dropped off to around the $2 range it is now. I realize the merger of the two companies was contested, but it seems like the view from regulator was, "Awww, we should let this go... the business proposition was horrible, and they can only exist if they merge. So let's throw them a bone and give them a chance. If nothing else they'll look cute together."

    In other, related news, is Howard Stern still alive and broadcasting? I haven't heard his name mentioned in so long that I had Google, "Shock Jock" to get his name. Perhaps he's broadcasting from a J.C. Penney?

There are a couple of other legit companies on the Mashable list that I'd invest in. Tops on that list is Electronic Arts. They have some great technology in sports video games and their exclusive contracts are hard to ignore.

There are other companies on the Mashable list of "household names" that I would not invest in. A great example is CarMax. I'm going to invoke the Red Hat rule, "Ask your mom about the business and what it does before calling it a 'household name'." This is especially true in an article of household names like this one. I have no clue what CarMax is. I had to look them up. I thought the top two online car websites were CarsDirect.com and Cars.com. Then I thought I thought that they were related to CarFax... a company that I've seen advertised a lot.

I think the bottom line here is that investing in individual companies is subjective. This is why we analyze companies before we invest in them. Consider this one person's opinion companies around the market capitalization of LinkedIn. At best it is one data point, make your own decisions from there.

Posted on May 24, 2011.

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7 Responses to “LinkedIn Goes Public: Reviewing the Valuation”

  1. Steve says:

    Thanks for the multiple mentions. I guess my take is simply that LinkedIn’s valuation seems much larger than it should be. Some of those are household names, some not. But LinkedIn’s IPO reflected (to me, at least) the beginning of a new tech bubble: at $4 billion, its market capitalization is 258 times greater than 2010 profit. And they project falling revenues and profits this year.

    And again, large is all relative. Its market cap (depending on the day) puts it in the top 500 – its revenue and income are a blip. I simply meant that this company is suddenly trading at wild multiples of its value. It is a large company – far larger than its income statement warrants.

    But fair enough. It’s a large IPO, let’s leave it at that. :)

  2. No Debt MBA says:

    I’ve been really shocked by the valuations given to internet companies recently. Along with LinkedIn, Groupon has recently been valued at a huge amount which is even more egregious, in my opinion. At least LinkedIn’s business model, while still not fully developed (or particularly profitable) has long term growth potential while Groupon is already being crowded for customers in the social buying craze. Groupon’s business model is also fundamentally unsustainable, again in my opinion, at the rate they and their competitors are going. There is very little room for growth, are we supposed to buy all our products and services at a 50% discount through their sites?

  3. Chad says:

    I agree with Steve that the LinkedIn valuation is much higher than it should be.

    That industry, social networking, has virtually zero barriers to entry. On top of that there is absolutely no reason not to put your free profile up at next month’s new site and then December’s new site, etc. Then who knows how sentiment swings.

    A friend I have, noted that her sister, who is just graduating from college, and her sister’s friends rarely use Facebook anymore. I don’t see LinkedIn being much different.

  4. Evan says:

    A 258 MULTIPLE?! For what? A place to look for a new job…

    Give me Chipotle anyday.

  5. I tried Linked In FIVE YEARS AGO and found it to be a waste of time back then. Too difficult to “connect” with anyone worthwhile. I have no idea how the site works now, but back then you had to get “introduced” by a mutual acquaintance. At least you didn’t/don’t have to pay the thousands of bucks to join a country club to get the same pretentiousness. At any rate, it seemed to be just a drowning pool of folks looking to pass around their resumes. Based on my own experience, I wouldn’t touch the stock with a 10-foot pole.

    However, I did buy my significant other a nice piece of jewelry two years ago at a JCPenney because their prices and selection were pretty good. She still wears it with pride. Would I buy their stock? Probably – if the only other alternative was investing in LNKD.

    Howard who? Oh, yeah – I listened to him complain daily about how he hated being on over-the-air radio and how he would “change the world” after going to satellite. I guess he still has a show – I can’t be bothered to check. I suppose that he can freely drop “f-bombs”, so at least he’s still breaking new intellectual, cultural ground.

  6. […] LinkedIn Goes Public: Reviewing the Valuation @ Lazy Man and Money […]

  7. Honestly I do not believe in web places profitability like facebook, myspace, youtube, linkedin…

    I think they are grossly overvalued – literally they have no tangible assets, no way no cash in quickly.

    Somebody tomorrow will have another idea and everybody will go there. I would not invest a penny in them, particularly when we are talking about financial independence.

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