By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
LinkedIn is riding in on Facebook’s hype. The smaller, professionally focused networking site has plenty to offer in the IPO prospectus it just filed. LinkedIn boasts 90 million users, quick growth and even a little profit, at least for now. Yet its model looks a bit more like Monster.com’s than Facebook’s. Hungry Web 2.0 investors may overlook the difference.
The business does appear solid. Even though most users access LinkedIn for free, sales nearly doubled in the first nine months of 2010, to $161 million. Moreover, the money comes from multiple sources. LinkedIn charges companies to search profiles and to place recruitment ads. It also provides broader advertising space. And it sells premium subscriptions. The balanced revenue blend provides some stability to the growth.
The gray market values LinkedIn at $2.5 billion. That’s baking in a lot of future profit. The parent company of somewhat comparable online job search sites Monster.com and HotJobs.com has a market capitalization of $2.2 billion, yet generates nearly four times the revenue LinkedIn does.
Of course, LinkedIn is growing much faster. And while it is largely used for employment purposes, LinkedIn does have a social networking element, which means users visit it often and give the site more data. That adds value for advertisers.
Yet the company isn’t very profitable yet. Net income is just 6 percent of sales, and LinkedIn says it will probably be in the red in 2011 due to heavy investment. Margins in Web companies are highly dependent on scale. Unfortunately, LinkedIn’s specialty means it can’t hope to attract Facebook-sized traffic — and therefore probably won’t come close to the social giant’s 30 percent net margins.
Then again, LinkedIn isn’t gunning for a $50 billion valuation either. But a $2.5 billion price tag puts LinkedIn at about 10 times estimated 2010 sales. That looks rich — Google went public at a roughly comparable multiple. It was growing faster at the time and its net margins were almost three times as high and rising. None of that may matter, though, for investors desperate to connect with social networking shares.