LinkedIn Valuation May Be More Like Salesforce Than Facebook

LinkedIn Corp., the first major U.S. social-media company to sell shares to the public, may deserve a valuation that more closely resembles those of business-software makers such as Salesforce.com Inc. than Facebook Inc.

Demand for LinkedIn shares prompted the company to increase the offering twice. The valuation of as much as $4.25 billion implies a multiple of 11.3 times projected annual sales, compared with 13.8 for Facebook and 8.3 for Salesforce.com.

LinkedIn is often compared with social networks such as Facebook and Twitter Inc., which depend on advertising to consumers. Yet LinkedIn gets 70 percent of revenue from business subscriptions, a model that’s similar to Salesforce.com, SuccessFactors Inc. and NetSuite Inc. This dual appeal and faster growth means LinkedIn warrants a higher valuation than other business-software providers, said Brian Jacobs, general partner at Emergence Capital Partners.

“It’s got aspects of the business software world but it also has these aspects of the consumer world,” said Jacobs, who is based in San Mateo, California. “When you’ve got a product that millions of people love, that helps the stock price.” Emergence was an early investor in Salesforce and SuccessFactors.

LinkedIn shares are expected to price later today. The Mountain View, California-based company yesterday increased the range at which they’ll be sold to $42 to $45 apiece, from $32 to $35 as planned last week. LinkedIn is offering 7.84 million shares. At the high end, LinkedIn would raise as much as $405.7 million, if underwriters exercise an overallotment option.

Software Subscriptions

Some investors may purchase LinkedIn shares because they view it as a proxy for social-media companies led by Facebook that have put off IPOs to pursue growth outside the regulatory glare that’s directed at publicly traded companies.

Still, LinkedIn said in its prospectus that a “substantial portion” of revenue comes from a business that’s comparable to the software-as-a-service model. That’s where companies deliver software over the Internet, a market that is expected to climb 16 percent this year to $10.7 billion, according to Gartner Inc., a research firm in Stamford, Connecticut.

“The long-term holders of the stock will be the ones that evaluate it like an enterprise SaaS company versus the ones looking for pure momentum,” said Dave Whorton, founder of Tugboat Ventures in Palo Alto, California, and an early investor in SuccessFactors. “They will have good visibility into what the company is today and what it will be in the future without having to speculate.”

SaaS companies, including Salesforce, NetSuite and SuccessFactors, sell subscriptions over the Internet rather than long-term licenses like traditional business-software companies.

Salesforce is the largest supplier of customer-management software. SuccessFactors makes Web-based human resources software, and NetSuite provides online accounting programs.

Social Network Valuations

Facebook and Twitter, social-networking sites that give their services away, have higher private-market valuations than LinkedIn based on potential revenue from advertisers aiming to reach hundreds of millions of users. Facebook, the world’s largest social-networking site, is valued at $55 billion on secondary exchange SharesPost Inc., while micro-blogging service Twitter is valued at $6.2 billion.

Morgan Stanley, Bank of America Corp. and JPMorgan Chase & Co. are leading the offering. The stock is expected to begin trading tomorrow under the symbol LNKD on the New York Stock Exchange.

Personal Profiles

LinkedIn members use the site to search for jobs, recruit employees and find industry experts. While users can create personal profiles for free, the company introduced paid subscriptions in 2005, giving recruiters more access to job candidates and providing business professionals ways to communicate with one another.

The hiring solutions business, targeted at recruiters, accounted for about half of LinkedIn’s $93.9 million in first- quarter revenue, with 30 percent coming from ads. The company’s projected valuation of 11.3 times sales assumes first-quarter revenue is replicated over the next three quarters. LinkedIn’s net income rose 14 percent to $2.08 million in the first quarter. Sales more than doubled.

“It is one of the most exciting companies to go public in recent times,” said Jason Rosenthal, chief executive officer of Ning Inc., a social media company in Palo Alto. “They have built a $250 million-a-year revenue business that’s profitable and growing at a fast clip. Something like that deserves to be highly valued.”

Premium Business

Some analysts are skeptical. Ryan Hunter of Wedge Partners Corp. wrote in a report on May 16 that even at $3 billion, LinkedIn may be overvalued. LinkedIn had previously planned a sale that would have given it a valuation at that level.

Hunter sees a conflict between LinkedIn’s premium subscription business and its advertising business. To satisfy subscribers, the company may need to cut out ads to premium members, hurting revenue, he wrote. Rising competition may also force the company to eliminate premium fees to keep users, with Facebook as a looming threat.

“Facebook users have a substantially higher level of engagement than LNKD users,” wrote Hunter, who’s based in Greenwood Village, Colorado. “If Facebook creates a way for users to feel comfortable managing their professional and social networks on the same platform, we would expect LNKD’s value to its users (and shareholders) to rapidly decline.”

In the planned IPO, about 62 percent of the shares in the offering are being sold by LinkedIn, which said it plans to use the proceeds to fund existing operations and to expand the business, possibly including buying other companies or technologies.

The sellers of the other shares include a venture capital affiliate of Bain Capital LLC, McGraw-Hill Cos., Goldman Sachs Group Inc. and founder and Chairman Reid Hoffman, the prospectus shows. Venture capital backers Sequoia Capital, Greylock Partners and Bessemer Venture Partners aren’t selling shares, according to the filing.

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