Is LinkedIn the new Netscape or the new Google?

This week, LinkedIn, the social net­work for pro­fes­sion­als went pub­lic and many prog­nos­ti­ca­tors have men­tioned it being sim­i­lar to the stock craze around Netscape at the begin­ning of the dot­com era. In order to assess if that were truly the case, I decided to run some num­bers against this IPO and also run some com­par­isons against the Google IPO, which was another tech IPO that was seen as ludi­crous at the time.

Look­ing at the basics

As fre­quent read­ers of TNL.net know, I have to a ten­dency to try to run some num­bers before pass­ing judge­ment. Often­times, I dis­cover that my hunch are cor­rect but, almost as often, I find some inter­est­ing and sur­pris­ing nugget of infor­ma­tion in the data. Ulti­mately, though, it’s a ques­tion of gath­er­ing the infor­ma­tion, some­thing that too few peo­ple seem will­ing to spend time on.

So for this IPO, I decided to inves­ti­gate how some fun­da­men­tals may be work­ing either for or against the suc­cess of the LinkedIn IPO. My instinct was telling me that the fun­da­men­tals may be dif­fer­ent now but I needed the data to assert which way things went. A lot of search­ing through both the web (and, as I men­tioned last week, get­ting his­tor­i­cal data can be hard on the web) and through paper record (books and mag­a­zines I still keep in my library), I was able to come up with the fol­low­ing chart:

One of the things that become appar­ent at first glance is that we are talk­ing about totally dif­fer­ent scales of busi­ness. Netscape was a com­pany oper­at­ing at a loss ($8 mil­lion) with very small rev­enue (not even a mil­lion dol­lars) when it went pub­lic. By com­par­i­son, LinkedIn seems to be a rel­a­tively healthy busi­ness with prof­its of $15 mil­lion on almost a quar­ter bil­lion in rev­enue. On the other hand, that busi­ness paled in com­par­i­son to Google, which was gen­er­at­ing prof­its of a quar­ter bil­lion dol­lars on rev­enues of $1.4 bil­lion in the run-up to its IPO.

Adding to the chal­lenge in com­par­ing them was the fact that they were all look­ing to raise dif­fer­ent amounts so I decided to play “what if” with the dif­fer­ent stocks.

What if LinkedIn had launched as Netscape?

I decided to nor­mal­ize the data based on a rev­enue, assum­ing that LinkedIn would try to get a mar­ket cap­i­tal­iza­tion equiv­a­lent to that of Netscape based on revenue:

So, already here, we see some fun­da­men­tal dif­fer­ences. Netscape would not even be allowed to go pub­lic today based on the pal­try rev­enue they were gen­er­at­ing at the time of their IPO and LinkedIn would turn into the largest cor­po­ra­tion in the world if the same logic had been applied to its rev­enue stream.

What if LinkedIn had launched as Google?

But the irra­tional exu­ber­ance around the Netscape IPO should not serve as a way to give LinkedIn a clean pass. In order to do so, I decided to com­pare the com­pany to Google at the time of its IPO. Peo­ple who were around then will remem­ber that the Google IPO hap­pened at a time when inter­net stocks were mostly out of favor but Google was gar­ner­ing a very strong fol­low­ing. In a lot of ways, Google had the media pres­ence of a Netscape in its time but with real rev­enue and earnings.

As price to earn­ing ratio are a valu­able way to eval­u­ate com­pa­nies, I decided to base my com­par­isons between LinkedIn and Google on it. So here goes:

The dif­fer­ence largely comes down to the num­ber of shares out­stand­ing but ulti­mately, it looks like LinkedIn P/E ratio are not that wild and while IPO Open­ing day are too small a data set to really make wild gen­er­al­iza­tion, it seems that the LinkedIn IPO was one that basked largely in rel­a­tively ratio­nal behavior.

Con­clu­sion

If the LinkedIn IPO is an exam­ple of what this boom cycle is going to look like, we may be in luck as the mar­kets seem to be act­ing a much more ratio­nal, profit-focused man­ner than they have in the past. My read is that there may even be some level of con­ser­vatism to the way mar­kets are approach­ing inter­net stocks and a healthy skep­ti­cism that will ben­e­fit real com­pa­nies by weed­ing out the ones which wouldn’t make the cut under nor­mal conditions.

Update: Some of my cal­cu­la­tions were wrong and, thanks to many com­menters, I finally have the P/E num­bers cor­rected. Based on the new num­ber, the con­clu­sion can be vastly dif­fer­ent as the P/E ratio for LinkedIn today seems to be much higher than it was for a com­pany like Google. Can LinkedIn be 5 times as suc­cess­ful as Google has been since its IPO? I don’t know. Is there some infla­tion due to a more opti­mistic mar­ket out­look? Absolutely.

At the end of the day, it looks like LinkedIn is over­priced, when com­pared to Google, and under­priced, when com­pared to Netscape. What that means in terms of invest­ment strat­egy is some­thing I’ll leave to peo­ple smarter than me to fig­ure out.