Bloomberg News

LinkedIn at 10 Must Justify Richer Value Than Facebook

May 09, 2013

LinkedIn Must Justify Richer Valuation Than Facebook

LinkedIn, founded a decade ago to connect recruiters and job seekers, is adding features and content to appeal to people who use the site from smartphones. Photographer: David Paul Morris/Bloomberg

LinkedIn Corp. (LNKD:US) unveiled its website ten years ago this week, from a tiny Silicon Valley office next door to an emerging social-networking service called Friendster.

A decade later, Friendster is kaput and LinkedIn is going strong, boasting 225 million users and a stock price that’s almost quadrupled since the company’s public debut in 2011.

The challenge for Chief Executive Officer Jeff Weiner and co-founder and Chairman Reid Hoffman is to avoid becoming another Internet also-ran by continuing to add products as membership growth slows. With a stock that trades (LNKD:US) at more than 120 times projected earnings for the next year, more than twice Facebook Inc. (FB:US)’s ratio, investor expectations for growth are unrealistic, said Michael Pachter, an analyst at Wedbush Securities Inc. in Los Angeles.

“I have trouble with hundred multiples,” said Pachter, who recommends holding the stock. “LinkedIn is trading at a significant premium to Facebook. That doesn’t make sense.”

Facebook, the largest social-networking site, trades at about 48 times estimated earnings, while the ratios for Google Inc. (GOOG:US) and Yahoo! Inc. (YHOO:US) are both less than 20.

Some skepticism on LinkedIn has already started setting in. The shares tumbled the most in almost two years last week after the company forecast sales that fell short of estimates. Fewer than half the analysts covering the company recommend (LNKD:US) buying the shares, according to data compiled by Bloomberg.

$20 Billion

LinkedIn is valued at about $20 billion, making it one of the biggest U.S. technology companies by market value. Mike Hickey, a Denver-based analyst at National Alliance Securities, called the stock “exceedingly rich,” in report this month.

For those involved with LinkedIn in the early days, when it consisted of 11 ambitious techies trying to ride the social-networking boom, the current numbers were unfathomable.

Started by Hoffman, a former PayPal Inc. executive, and four friends, LinkedIn introduced its site to the public on May 5, 2003, to little fanfare. By getting friends, family and acquaintances to sign on, the company surprised itself by reeling in 6,000 members in its debut, said Konstantin Guericke, a co-founder and an early marketing vice president. The next few months were a disappointing slog.

“We made bets that evening on how many users we’d have in 30 days,” Guericke, who left the company in late 2006, said in an interview. “Everyone wildly overestimated.”

Sequoia Capital

Mark Kvamme, who at the time was a partner at famed venture firm Sequoia Capital, saw the promise. He said he was introduced to Hoffman by Gina Bianchini, an entrepreneur whose company was backed by Sequoia. Kvamme had witnessed the early growth at Friendster, which was well on its way to millions of users, and his firm had bet on Plaxo, Sean Parker’s social-networking service that would eventually fizzle.

Kvamme said the possibility to connect professionals was more interesting because it meant catering to people with spending power. He led a $4.7 million investment in late 2003, when the site was being used by just 40,000 people.

“We knew if we could get 200 million white-collar workers together into a central place to do business, this would be very valuable,” Kvamme said.

He had no idea it could be worth this much. Kvamme said that in February 2010, more than a year before LinkedIn’s initial public offering, he jokingly told Hoffman and Weiner that he wasn’t going to sell a single share until the company reached a market value of $20 billion.

‘Popular Applications’

“Unfortunately, I did sell some shares,” said Kvamme. He left Sequoia and the LinkedIn board in 2011 to take a job with Ohio Governor John Kasich, and is now starting a venture firm in Columbus, Ohio.

A year after Sequoia’s investment, LinkedIn was catching on, surpassing the 1 million member mark. The company raised $10 million from investors led by Greylock Partners in October 2004, and said at the time that recruiting had become “one of the most popular applications” on the site.

“We really believed that your business world was going to become a critical part of your need on the Web,” Greylock partner David Sze said in an interview today on Bloomberg West.

The next year, LinkedIn started offering premium services, like allowing hiring managers to post jobs and get recommendations from contacts, providing a business directory to let companies promote their services and letting users pay to message people outside their network.

Slowing Growth

In 2007, LinkedIn recorded sales (LNKD:US) of $32.5 million. Five years later, the figure had expanded to $972.3 million. Analysts on average expect revenue of $1.5 billion in 2013, according to data compiled by Bloomberg.

Still, the number of new members LinkedIn is adding each year is slowing. Membership increased 36 percent in the first quarter from a year earlier, down from 39 percent in prior period and 43 percent in the third quarter.

LinkedIn is compensating for the trend by adding mobile and web services to keep users on the site for longer. The company paid $90 million for news-reading application Pulse last month, adding to the content LinkedIn already offers from influential members who volunteer to write guest blog posts. Former General Electric Co. CEO Jack Welch, billionaire oilman T. Boone Pickens and William Morris Endeavor Entertainment LLC co-CEO Ari Emanuel are contributors.

Enhanced services give LinkedIn more opportunities to sell ads, which account for 23 percent of sales, and will allow the company to eventually charge more money for subscriptions, said Wedbush’s Pachter.

“You can see how there really is that much money at stake,” he said.

‘Come Together’

Weiner, a former Yahoo! Inc. executive who joined the company more than four years ago, said he holds open town hall meetings every other week for employees, to stay connected as LinkedIn expands.

“Open communication is so important,” he said today in an interview on Bloomberg West. “The more optics we can provide to our employees, not only what is working but what is not working, the better we can come together to improve the things that need to be improved upon.”

Hoffman’s job as chairman is to work on special projects and to add his insight as a venture capitalist -- he’s a partner at Greylock -- to keep the company abreast of emerging trends. In technology, big companies face the risk that smaller startups will create products that are cheaper and easier to use, much as LinkedIn did to the recruiting industry.

“What changes are happening that if we don’t invent the right thing, someone will invent the right thing,” Hoffman said in a Bloomberg West interview. “So let’s go invent that thing.”

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net


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Companies Mentioned

  • LNKD
    (LinkedIn Corp)
    • $223.26 USD
    • -0.94
    • -0.42%
  • FB
    (Facebook Inc)
    • $73.86 USD
    • -0.78
    • -1.05%
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