Business

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:

Name Netscape LinkedIn Google
IPO Date August 9, 1995 May 19,2011 August 19, 2004
Ticker NSCP LNKD GOOG
Market NASDAQ NYSE NASDAQ
Strike Price $28 $45 $85
Amount Raised $9.5 million $353 million $1.67 billion
# of shares issued 339,285 7. 84 million 19.6 million
Value based on strike price $1.39 billion $4.3 billion $23 billion
First day high $75 $122.69 $104.06
End of day price $58.25 $94.25 $100.33
Market Cap. First Day Close $2.9 billion $8.4 billion $27.1 billion
Revenue $696,000 $243 million $1.4 billion
Profit (Loss) ($8 million) $15 million $250 million

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:

Name Netscape LinkedIn
Value based on strike price $1.39 billion $4.3 billion
Revenue $696,000 $243 million
Market cap / revenue 1997 17.69
Linkedin value assuming Netscape marketcap / revenue $485 billion
Netscape value assuming LinkedIn marketcap / revenue $12.312 million

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:

Name LinkedIn Google
Strike price $45 $85
First Day Close $94.25 $100.33
Profit $15 million $250 million
P/E ratio at opening 286.66 92
P/E ratio at close 560 108.4

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.

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23 Comments. Leave new

Hi, thanks for digging up the data for Netscape and Google… quite insightful. Your analysis is good, except for the very last section. The ‘P’ in the P/E ratio is not the opening/closing stock price, but is the market cap. Linkedin has opening and closing P/Es of about 287 and 560, respectively.

Thanks for the thoughtful post!

-Chris

    Isn’t the formula for P/E Price / earning per share? So first, I calculated the earnings per share by total earnings ($15 million) by the total number of shares. Then I took the share price and divided it by the earnings per share. Was my math wrong?

      Tristan, I believe you got the earnings per share wrong. You meant to divide the profits by the number of shares but ended up dividing by the price per share. Using your number I get LinkedIn earnings of only $0.16 per share. Compare that to the price per share you get a P/E ratio of close to 600.
      -Marc

yes your math is way off. the eps for lnkd is nowhere near $6.

Cara Nelson
May 23, 2011 2:16 am

 It seems investors are eager to pounce, however, we are being cautioned about the possible pitfalls of this massive increase.           http://bit.ly/mkxfme

 This is a problem when using correlation as your basis– anything really goes and your rationale is only as good as any.

Thing is, LinkedIn is a solid company but is a very different one from the mass-market dominating examples of Netscape and Google.  Facebook is the only real analogy to these two. What LinkedIn is is a harbinger of things to come. That is all.

 Let’s see… if LInkedin issued 7.48 million shares and its earnings were $15 million, then the earnings per share work out to $2.01 per share. At an opening price of $45, that’s a P/E of 23.4, and at a closing price of $94.25 a P/E of 46.9. (Of course, if there are additional shares of Linkedin held by insiders not offered at the IPO, then the calculation would be different, based on the correct total number of shares issued.)

    Actually, isn’t the earnings per share based on ALL shares, not just shares issued? But maybe you’re right. Could other contributors (with a better understanding of EPS) chime in. If Omega is correct, I’ll change the numbers in the entry.

 Something’s definitely off in your math. LinkedIn makes $15m profit. They’ve issued 7.3m shares, you don’t list the total number of shares outstanding, but I understood they did only a sliver of the whole company. Even with the 7.3m shares you get an EPS of ~$2 vs. your $6.3. Also the simplest way to do P/E (roughly) would be divide the market cap by profit (by share you’d just divide both figures by the # of shares outstanding, so that can be taken out of the formula). That way you get to Chris’s #s.

 Comparing linkedin or facebook to Google’s IPO or google as a company is grossly incorrect.

Google hit upon the magic of adwords, a SEARCH advertising product which took off excellently and made them super rich. If you see revenue streams of facebook or linkedin, you see them struggling with inherently hacky and non scalable monetization like hiring solutions, virtual goods, me too daily deals, like buttons on levi jeans. Facebook advertising has extremely low CTRs and extremely high inventory. Linkedin has better inventory but not enough of it. Just a search on the internet will make it clear that they cannot possibly increase their revenue 5 fold in 2 years, atleast through the current ads system. The ROI on most ads is pretty low, which was not the case with adwords.

But since you are into numbers only…your analysis might make sense if they were to somehow scale their monetization efforts, else you will be pretty much doing this : http://xkcd.com/605/

    I was trying to find some ways to rationally compare companies prospects. Remember that when Google went public, people thought the 20 billions valuation was insane. So I’m trying to inject a little extra logic either in support or against LinkedIn.

i prefer XING though

Yes Tristan, P/E is price/earnings per share. But earning per share is calculated as profit/all shares, not as profit/issued shares. Chris’s calculations are correct. Seems like LinkedIn’s valuation is extremely high after all.

Markjmayhew
May 23, 2011 9:25 am

LinkedIn didn’t IPO in May 2010, it was 2011

Interesting. Thanks for sharing.

After the 90 day lockup is over…..just watch the shorts take this baby for a ride…this was all about NYSE trying to be Tech star ipo go to…

CornerPocket
May 25, 2011 10:28 pm

Poor comparisons. You should be comparing linkedin to the offerings from monster, hotjobs, careerbuilder, &c.

These numbers really mean nothing without growth.

    That would be a good idea if those guys were publicly traded entities on their own but I seem to remember that Monster and Hotjobs are divisions of other companies with different business and those companies do not break out the numbers specific to those entities so it makes the comparison difficult.

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