Linkedin and the New Tech Bubble

Published by Filipe R. Costa on Mon, 23/05/2011 - 11:52
linkedin IPO


Linkedin has just seen its shares going into the NYSE last Thursday. The company’s IPO was valued at $45 per share but soon after the first day of trading it was valued at more than double that price. Are we going to assist to another tech bubble? Or are Linkedin prospects really good?

Linkedin is currently valued at $8.8 billion. The company has more than 100 billion users and posted $250 million in revenues and a profit of $15.4 million last year after two consecutive years of losses. Revenue per user is of just $2.5 but any investor buying shares at the current price is paying $88. The company is trading at 35 times its revenues and at 571 times last year earnings.

A few days ago, Microsoft bought Skype for $8.5 billion, a similar value to what Linkedin is currently worth. But Skype posted revenues of $860M last year (although a net loss of $7 million). The company reported around 670 million users at the end of 2010. This means Microsoft is paying $12.7 per user for a company making $1.2 in revenues per user.

Skype and Linkedin are different businesses although they are both internet-based and use a subscription feature. Skype has changed hands a couple of times without any success and is struggling to put a profit although having 7 times more users than Linkedin. Looking at current revenue per user of $2.5 it is tough to understand how an investor can recover its investment when paying $88. It is really difficult to understand how a Linkedin user can worth that much.

According to Rick Summer, a Morningstar analyst, Linkedin can increase its revenue to $1.5 billion in five years what would make the shares worth $27. In order to be worth the current price of $93, the company would have to put around $4 billion in profit in five years.

It is hard to believe this company can multiply its revenues by 16 in just five years. Given all estimates and the risk involved, investors are paying a price for the best possible case scenario Linkedin faces in the future. And that has very low odds. Long-term investors should be carefully about current value and put their eyes in the last tech bubble. Paying any price just because past performance is skyrocketing is not reasonable. Spread betters are more concerned with short-term trades that last from a few days to some weeks. Given all the hype on these shares, it may be the case Linkedin shares continue to climb in the meantime. But in the long-term share prices will respond to value and because expectations are high, the first negative surprise will cause some high damage in the share price.