Ipo of Linkedin
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SWOT ANALYSIS
LinkedIn has the largest number of membership among its competitors, helping it to remain old members and attract new members. This advantage will also keep the leadership to remain in LinkedIn’s hands. Additionally, having the highest membership count also attracted more job listings and thus attract more members. Moreover, LinkedIn members have higher incomes, higher education levels, and are more likely to be employed. The distinct demographics of LinkedIn’s members are key to determining its competitive position in the growing online advertising market.
Although LinkedIn is the clear leader in the U.S market, it has strong competitors, Viadeo and XING, in European market. Thus, LinkedIn is less able to attain such huge percentage of memberships in foreign market as in the U.S market.
Being the first company in the segment to go public gives LinkedIn a more chance to grow its membership, improve customer service, and expand technical capabilities. Furthermore, more people use social media for recruitment purpose, giving LinkedIn a strong growth potential.
The members in emerging markets and in parts of Europe tend to have lower revenue. They will not only not pay the member fee, but also increase the total cost for LinkedIn, such as cost of technological infrastructure and also cost of the site features and languages that must be customized to serve a variety of local markets. What’s more, other social network company, like Facebook, may enter the professional segment and threat LinkedIn’s status.
THE FINANCIAL PERFORMANCE IN PRO-IPO YEAR
In the pre-IPO year, the sales revenue of LinkedIn doubled ($243,099 in 2010 and $120,127in 2009). This increase of sales revenue also makes the operating income and net income to be positive in this year. If we add back the depreciation and amortization expense to the operating income, the total EBITDA LinkedIn earned in 2010 ($47,959) is 4 times large than the EBITDA we earned in 2009. That means LinkedIn has an extraordinary growth rate with great potential.
The net profit margin of LinkedIn is 6.33%, which is much lower than that of XING (13.28%). The return on equity ratio of LinkedIn (42%), however, is almost four times larger than that of XING (11.78%). This reversal is likely due to XING’s publicly traded position, while LinkedIn was still a private company at that time. As a result, LinkedIn has a relatively small and stable number of shareholders, and thus each shareholder has a higher average return. Additionally, the absolute amount of net profit of LinkedIn ($15,385 thousand) is more than double that of XING ($7,211 thousand). Thus, both the absolute value and the relative ratio has shown a higher profitability of LinkedIn.
RELATIVE VALUATION
This report uses three benchmarks in relative valuation model: the closest peer company, U.S. and foreign companies operating in this industry, and other social media companies.
When compared with the closest peer company-Xing, P/E ratio is the best choice. Use market capitalization as numerator and net income as denominator. The market capitalization of LinkedIn is 0.4 billion. Exhibit 1 presents the details in calculation.
The second method is comparing EV/EBITDA ratio with U.S. and foreign companies operating in this industry. The operation of LinkedIn can be categorized into three segments: Hiring solutions, marketing solutions, and premium subscription. Then choose comparable companies in each segment. The criterion of comparable companies is their major business match the three segments properly. 73% revenue of LinkedIn comes from U.S, so companies whose revenue mainly comes from outside U.S are taken out of consideration. In the following calculation, the EBIDTA data is the average of EBITDA at the end of 2010 and 2011.
In hiring segment, Monster is the best choice because of its global leadership position in online employment industry. In marketing section, both Yahoo and Google make profit in advertising. Use EV to get the weights of two companies, then allocate the ratio use this weight. In premium subscription, two comparable companies are chosen: Ancestry.com and Netflix. The two companies that most relevant to marketing operation. Use the same method as marketing section. The detailed calculation is shown in Exhibit 2. The equity value of LinkedIn from comparing with other U.S. and foreign companies operating in this industry is 0.75 billion.
The last way is to compare LinkedIn with other social media companies-Facebook and Twitter. The EV of Facebook and Twitter is the average EV of estimated data. Then, use EBITDA margin times revenue to get the EBITDA. The equity value under this method is 1.3 billion, Exhibit 3 shows the details.
The best multiple and peer group is the second one. Compare EV/EBITDA of LinkedIn with U.S. companies operating in this industry. When using P/E ratio, the company must have similar leverage level with the comparable. It’s difficult to measure what is a similar leverage level. But the EV/EBITDA is capital structure-neutral, and, therefore, this multiple can be used to directly compare companies with different levels of debt. Different segments always have different ratios, it’s reasonable to use each segment’s ratio separately.
ABSOLUTE VALUATION
Growth Rate and Growth period: This report uses the historical growth rate to estimate future growth. The calculation of the growth rate of the past five years are listed in Exhibit 4. From the table, LinkedIn grows at a dramatic rate. The increase in the annual growth rate, however, shows a downward trend. Therefore, the assumption of JP Morgan, which assumes LinkedIn will continue to experience