Linkedin IPO will give us a better understanding of where Social Media headed

Secondary market trading for Social Media suggests that these companies are overvalued.  Facebook with last reported revenue of 2 Billion Dollars is trading in the secondary market at a valuation of $75 Billion Dollars. That is 35 x revenue and we have no idea how many times earnings its trading.  However, Linkedin with 90 million users in over 200 countries is valued on the secondary market at around 2.5 Billion Dollars and is set to go public sometime this year.  They reported a nine months ending 2010 revenue of 161 million dollars and net earnings of 10 million dollars.  Compared to Facebook’s 35 times revenue, Linkedin is currently valued at 16 times the revenue and 250 times the earnings. 

Linkedin is one of the popular social media sites and has three streams of revenue income.  The revenue sources are from Hiring Solutions, which makes up 41% of total revenue, Marketing Solutions, which makes up about 32% of total revenue and the remaining 27% is from Premium Subscriptions.  This suggests the bulk of their revenue is coming from Hiring Solutions and may continue to do so going forward.  Furthermore, according to the Company’s S-1 filing, 2010 was their first profitable year.  Given these numbers, the valuation at 2.5 Billion is too large to justify.  Even with the most optimistic Price to Earnings Growth forecast, I am giving it 800 Million Dollars at most.  

Moreover, as the jobs market continue to improve; I don’t foresee the same level of growth continuing for the Hiring Solutions side of the business.   Although I use Linkedin to stay connected with professionals in my network and to source for future deals, I personally have not used and do not foresee myself using the subscription services in the near future.  The only sustainable model for continual high growth is the Marketing side of the business as advertisers continue to target professionals categorized by industries.   

However, Linkedin IPO will tell us whether the hype in social media will continue or if it will be a timely exit for the VCs heavily invested in these companies.  What the market has taught me in the last ten years is that we have to switch back and forth between fundamental and behavioral finance.   Remember back in 1995 when the Dot Coms were overvalued?  Well, the true fundamentalist missed out on the next four years gain.