Analysis of Linked In
Yesterday Linked In, a social networking company that focuses on professionals went public at $45/share and closed at $94.25/share, up over 100%, giving the Company a market capitalization of just shy of $9 billion. I consider myself an optimist, but this sure seems like the dot.com bubble of the late 90's all over again. When I was working in public accounting at the time, there was a steady stream of dudes in khaki pants and polo shirts who would show up to our office with a slick logo, business plan and a half-built website, expecting to go public. Well, at least this company has been in business for a few years and recently turned a profit. The same couldn't be said for a lot of companies that went public in the late 90's - so much so that they had to invent new metrics like price/sales ratio and revenue growth rate instead of price/earnings (since there were no earnings).
I attached an excerpt of key financial data from the Linked In registration statement below. Like most startups, the Company has been losing money for the past several years until the most recent nine month period. If you annualize the $0.11/share earned in the first nine months of 2010 to $0.15/share, that makes the P/E ratio 628. Contrast that with Google's p/e ratio, which is about 21 or Ebay's, which is about 23 and you begin to see the disconnect.
While revenue has doubled over the past year, EBITDA margin is about 20% and the Company is profitable, that still seems like a rich valuation for a startup.
Year Ended December 31, Nine Months Ended
September 30, 2005 2006 2007 2008 2009 2009 2010 (in thousands, except per share data) Consolidated Statements of Operations Data: Net revenue $ 1,195 $ 9,836 $ 32,486 $ 78,773 $120,127 $ 80,794 $161,403 Costs and expenses: Cost of revenue (exclusive of depreciation and amortization shown separately below) 750 2,019 7,384 18,589 25,857 18,021 29,982 Sales and marketing 1,075 1,555 5,037 16,986 26,847 17,577 38,340 Product development 2,701 4,411 11,578 29,366 39,444 27,307 44,151 General and administrative 1,426 2,248 6,812 12,976 19,480 12,831 23,431 Depreciation and amortization 674 973 2,107 6,365 11,854 8,399 12,986 Total costs and expenses 6,626 11,206 32,918 84,282 123,482 84,135 148,890 (Loss) income from operations (5,431) (1,370) (432) (5,509) (3,355) (3,341) 12,513 Other income (expense), net 120 696 773 1,277 230 359 (269) Income (loss) before income taxes (5,311) (674) 341 (4,232) (3,125) (2,982) 12,244 Provision for income taxes 1 3 13 290 848 399 2,176 Net income (loss) (5,312) (677) 328 (4,522) (3,973) (3,381) 10,068 Undistributed earnings allocated to preferred stockholders — — (328) — — — (8,215) Net income (loss) attributable to common stockholders $(5,312) $(677) $— $(4,522) $(3,973) $(3,381) $1,853 Net income (loss) per share attributable to common stockholders: Basic $(0.19) $(0.02) $0.00 $(0.11) $(0.10) $(0.08) $0.04 Diluted $(0.19) $(0.02) $0.00 $(0.11) $(0.10) $(0.08) $0.04 Weighted-average shares used to compute net income (loss) per share attributable to common stockholders: Basic 28,101 31,438 38,092 42,389 41,184 41,032 42,239 Diluted 28,101 31,438 38,961 42,389 41,184 41,032 45,486 Pro forma net income (loss) per share attributable to common stockholders (1)(unaudited): Basic $(0.05) $0.11 Diluted $(0.05) $0.11 Pro forma weighted-average shares used to compute pro forma net income (loss) per share attributable to common stockholders(1)(unaudited): Basic 86,822 87,884 Diluted 86,822 91,131 Other Financial and Operational Data: Adjusted EBITDA(2) $(4,749) $(285) $3,480 $5,461 $14,651 $9,364 $31,619 Number of registered members (at period end) 4,148 7,885 16,712 32,307 55,111 48,004 80,553
Below is a breakdown of revenue by source and geography from the financial statements. The Company's main source of revenue is from selling services to companies/recruiting firms, followed by marketing and then premium subscriptions. The premium subscription revenue is a bit of surprise to me. I have a Linked-in account, but would certainly never pay for it and don't really use it that much. If I had to guess, I would say the same is probably true of most of their 90+ million members and yet they earned $44 million in 2010 on premium subscriptions (although that revenue stream isn't growing as fast as the others, which you would expect).
It will be interesting to see how this stock performs in the coming months, especially when the lock-ups expire and insiders/pre-IPO buyers start selling their shares.
Year Ended December 31, Nine Months Ended
September 30, 2007 2008 2009 2009 2010 (Unaudited) Net revenue by product: Hiring Solutions $7,467 $17,352 $36,136 $23,753 $65,926 Marketing Solutions 7,780 25,972 38,278 23,820 51,370 Premium Subscriptions 17,239 35,449 45,713 33,221 44,107 Total $32,486 $78,773 $120,127 $80,794 $161,403 Year Ended December 31, Nine Months Ended
September 30, 2007 2008 2009 2009 2010 (Unaudited) Net revenue by geographic location: United States $25,512 $61,211 $88,483 $60,128 $118,564 All other countries (1) 6,974 17,562 31,644 20,666 42,839 Total $32,486 $78,773 $120,127 $80,794 $161,403