Is LinkedIn Undervalued?

Yesterday, LinkedIn provided more details on their hotly anticipated IPO. Share prices will be between $32-$35, valuing the company at about $3 billion. Compared to other social media darlings, this seems to be a surprisingly low valuation.

LinkedIn: So much more than the ‘other’ social network

With the endless publicity received by Facebook and Twitter, LinkedIn is often relegated to being the ‘other social network.’ As recently as January of this year, Reuters proclaimed “LinkedIn rides in on Facebook’s hype.” As the IPO draws closer, the valuation of LinkedIn is considerably lower than the speculated value for both Facebook and Twitter. Twitter has a rumoured valuation of between $8-10 billion despite having less revenue that LinkedIn. While Facebook has the most revenue of the ‘big three’ at nearly $2 billion in 2010, their valuation seems too high at about 35 times their annual sales.  LinkedIn’s IPO places their stock close to 12 times revenue, according to Reuters.

More than a job board

Many still view LinkedIn as primarily a job board, with aspects of a social network built in. That is certainly part of their business, but the brand offers much more than that. In fact, revenue from job listings makes up less than half of their total sales. As people come to appreciate the rest of what LinkedIn has to offer, their growth of LinkedIn will accelerate.

The Power of the Network

The power of the LinkedIn network is different for different people. Companies can use the site to find sales leads and research prospects. Users can build their personal brand and establish themselves as experts in their field.  And as users begin to interact more and more with the site, LinkedIn is developing a war chest of data that is unrivalled in many ways. Take a look at LinkedIn inMaps for a taste of what they are capable of. While other big internet companies have similarly large troves of consumer data, LinkedIn is unrivalled in the professional space, a market that advertisers will be willing to spend big bucks to reach.

The brand is clearly aware of this and is making moves to increase user engagement in order to collect more data. The recently launched LinkedIn Today is a prime example. The news service is differentiated from other sources because it leverages the data they have on their users, while at the same time collecting even more information about their online habits. Expect to see more services offered from the smart folks at LinkedIn Labs that uses data in new ways and encourages you to spend more time on their site.

Multiple Revenue Streams

While LinkedIn’s revenue may still be below Facebook, they enjoy 3 distinct (and growing) streams of revenue. For each of these, LinkedIn is differentiated from competitors:

  • Advertising: unique focus on professionals and businesses
  • Premium Memberships: there is no similar service available today of a comparable scale
  • Job Postings: while there are lots of job boards online, LinkedIn is the clear leader at integrating listings into your professional network

From an investor’s point of view, this diversification should drastically reduce their risk, making a stake in the company even more valuable.

Will you invest?

Many pundits talk of a new bubble in the social media companies, but that bubble seems to have by passed LinkedIn.