Wednesday, February 09, 2011

Social Business when does it pop?

Okay so LinkedIn is leading the social business IPO charge with various numbers being touted as a valuation from its current off market evaluation of $2.5bn (on $161m revenues and $10m profit in 9 months) to the proposed IPO. Revenue is more than doubling over 2009, but costs are nearly matching the same level of growth which delivers the minimal actual profit. The forecast isn't exactly huge either with them predicting slow downs, not this could be CYA words but there are some good points in there.

So what would $2.5bn as a valuation make LinkedIn equivalent to in the "real world"? Well how about Easyjet? Easyjet are a low cost airline who are part of the revolution in the cost of short haul travel in europe.

Assuming LinkedIn's profit/revenue growth continues then lets say we get $210m revenue and $15m profit. So how does Easyjet stack up? Well from one perspective not well.

Revenue at EasyJet was £2.97bn so almost 40 times (1.6x $) , Profit was £121.3m or about 12x (EBITA is £274m). So bang for buck is arguably better with LinkedIn but what does this profitability mean for EasyJet's valuation? £1.7bn which is about $2.7bn or probably less than LinkedIn will IPO for.

Ah but LinkedIn has 90m users, although few use it regularly and some accounts might be duplicates... as opposed to Easyjet who have "only" 50m passengers per year.

Now there are lots of other bits that drive valuations but haven't we seen this before in terms of massive valuations for companies where profitability was a secondary element? I like LinkedIn, I use LinkedIn and I wish them all the luck in the world. I can even see their business model around job hunting and head hunting making a lot of sense and them really getting a decent set of revenue from it.

But are they worth the same as a well run and profitable airline? The answer is of course that they are worth what people will pay for them which means invest at the start of the bubble but don't forget that its a bubble.

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