The lofty valuation of LinkedIn, the massively popular professional networking site, makes one wonder if investors have forgotten the perils of paying too much for a stock, however sexy its prospects may be, a mere decade after the bursting of the technology bubble. LinkedIn, which will start trading tomorrow under the ticker symbol LNKD sold 7.84 million shares at $45 each valuing the company at $4.25 billion.
According to its registration statement available here, LinkedIn revenues were $161 million in the nine months ended September 30, 2010. If we assume that LinkedIn doubled its 2009 sales, its revenues for financial year would amount to $240 million. That would mean investors are valuing the company at 17.7 times previous year sales. LinkedIn is only barely profitable. In the first nine months of 2010, LinkedIn earned just $1.8 million. If we assume that the company earned $4 million in FY2010, it would mean that the company is sporting a trailing p/e of over 1,000. Registered users, unique visitors and page views — not revenues and income — are called “key metrics” in the registration statement. In the late nineties, the buzz word used to be “eyeballs”.
LinkedIn is not the only company valued at eye-popping levels. Microsoft recently acquired Skype for $8.5 billion. The press release that announced the acquisition makes no mention of any financial metrics but trumpets the number of users Skype has and the volume of traffic on Skype’s network. Skype reportedly had total revenues of $860 million and a net loss of $7 million in 2010. Groupon, Twitter and Facebook are all rumoured to be IPO candidates priced at similarly nose bleed levels. Some of these companies could turn out to be the next Google or Amazon but at these prices a lot of that potential is probably already priced in. And investors should recall that rich valuations also have the potential to end in tears.
