Lost in the ballyhoo surrounding Facebook's initial public offering (IPO) was the quiet first anniversary of the IPO of the first social media site to go public, LinkedIn. The company was initially listed on Nasdaq on May 17, 2011. Today it trades at slightly more than $100, or about $10 more than its IPO price.
Is that rise justified? If so, then what about the even more pronounced rise from LinkedIn's low-60s local nadir in January?
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LinkedIn boasts 161 million users, which means that at least some of you don't know what it is. At its essence, LinkedIn is a searchable database of resumes. Upload your work history and qualifications, find coworkers past and present and LinkedIn will determine how many degrees of separation you are from any other user (to a maximum of 3.) To put it more succinctly, LinkedIn is Facebook without the incriminating photos and inane comments. For employees, LinkedIn is a way to connect and perhaps recommend colleagues for future positions. For employers, LinkedIn is supposed to serve as a recruiting tool.
With a year of public trading in the record books, we now have enough data to give a critical assessment of LinkedIn stock as an investment; thanks to the company's required filings with the Securities And Exchange Commission (SEC), unencumbered by analyst commentary and hearsay. Looking at LinkedIn's statement of operations, its quarterly revenue more than doubled over the last three months of 2011, to a prorated annual level of almost three-quarters of a billion dollars. That's not stratospheric like Facebook, or even Groupon, but as potential investors we're more interested in the ability of LinkedIn to repeat and expand upon those results over time.
Did we mention that LinkedIn is free to join? So where does the revenue come from?
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The company employs three levels of paid membership, ranging from $20 to $100 monthly. Pay, and you have the privilege of sifting through up to 700 profiles when you search. Also, you can see who's been looking at your profile (as a collective gasp echoes among the non-paying members who weren't aware of that feature.)
Costly as the premium memberships might sound, they only account for one-fifth of LinkedIn's revenue. Most of the rest comes from want-ads, which each cost around $200 to place. The rest of the revenue comes from companies that purchase LinkedIn's "marketing solutions," a piece of corporate speak that translates as discreet display ads, social ads and analytics and research.
LinkedIn's net income over the first quarter of 2012 stood at a hair under $5 million, continuing the company's history of up-and-down profits. Annual net income had actually decreased in 2011, to just under $12 million from the previous year's $15.4 million. This is despite a consistent annual 10% increase in users.
Turning to LinkedIn's balance sheet, growth from the previous quarter was steady and relatively unspectacular. Current assets increased from $726 million to $782 million, total assets from $874 million to $951 million. In fact, almost every significant category on the statement of financial position increased in a similarly proportional manner. Liabilities moved from $249 million to $295 million, current liabilities from $227 million to $264 million, stockholders' equity from $625 million to $656 million (no surprise, given the concomitant rise in the stock price).
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Which takes us to the final leg in the trinity of financial statements, LinkedIn's cash flow statement. Among the three ways cash can flow into a company--via operations, investing and financing, it's the first of those that bodes strongest for a newly traded company's long-term potential; and net cash from operating activities is where LinkedIn shines most brightly. Contrasting the first quarter of 2012 with the first quarter of 2011, cash flow via operations increased from a formidable $27 million to $63 million.
To a skeptical investor--and you should always be skeptical, even of Apple and Wal-Mart--LinkedIn's numbers look good. The company certainly isn't losing money, and it's not making enough to raise panicked questions (see Enron, Tyco et al.); but does LinkedIn have the profile of a company with an $11 billion market capitalization?
True to its form, and to its corporate identity as the efficient and antiseptic alternative to fancier and flashier social media sites, LinkedIn has managed to position itself as a legitimate enterprise free of undue Wall Street attention. That being said, there's one staggering quotient that should draw the attention of the aforementioned skeptical investor.
LinkedIn's price-earnings ratio is in the unsustainable 650-750 range. The established stock that trades at 700 times earnings does not exist. It's a mathematical inevitability that either earnings have to rise, or price has to lower. Given that LinkedIn's earnings are progressing consistently, if modestly, that leaves us with a ratio that features a stable denominator and an awfully tentative numerator.
The Bottom Line
LinkedIn's first year as a publicly traded stock, and in particular its most recent quarter, serve as testament to the level-headed growth espoused by its management team. But as many a corporate executive knows, stock price is frequently out of the directors' hands.