This paper explores LinkedIn’s business model (including opportunities and threats), as well as the corporation’s competitive landscape and the details of the initial public offering (IPO). In this paper different approaches to assess a company value will be discussed, followed by an examination of LinkedIn’s company value by carrying out a multiple analysis. A special emphasize will be taken on the closing price for LinkedIn shares on the IPO (and also a few weeks later on July 7, 2011), were the company was worth 592 times its 2010 earnings. The research evaluates if the company could possibly be worth that much or if a general hype for social media company´s has taken over.
Why and to what extent, an IPO is successful, lies always in the opinion of the different stakeholders of this event. Obviously there are two main stakeholders: the company owners and the investors. For company owners, an IPO will be about developing their company to the next stage. Raising new capital for investment, attracting and incentivizing the best talent, and establishing a liquid currency for the future. For them, valuation1 at IPO and a healthy aftermarket with a steady appreciation in the value of the shares as the company develops, will be key.
For investors obviously an IPO is successful, if the share price is going up, not down. But since nobody can tell that for sure, how do you decide if you invest your money at an initial public offering of a certain company? There are various ways to do that, some people decide just to go with the flow, jumping on a train that’s already under full force (e.g. dot.com hype). Other will do an extended research for the opportunities, growth potential and threats of the business model, as well as the possible competitors and challenges they will face in the future. Some, on the other hand, will go for the figures and financial analyses. Since there is a saying “the only statistics you can trust are those you falsified yourself” (mostly allocated to Winston Churchill, but not verified), it seems logical to build the decision on all three factors.
Table of Contents
LinkedIn´s Business Model at the Time of the IPO
Hiring Solutions
Marketing Solutions
Premium Subscriptions
LinkedIn´s Opportunities and Threats at the Time of the IPO
Opportunities
Threats
LinkedIn´s Competitive Landscape at the Time of the IPO
Analogs
Job Boards/Online Recruitment
Social Media Networking/Search Engines
LinkedIn´s Company Value – Multiple Analysis
EV/EBITDA
EV/Sales
EV/User
LinkedIn´s IPO – Brief Details
Facts
Rumors
LinkedIn´s Share Value – July 7, 2011
Research Objectives and Themes
This paper examines the business model, competitive landscape, and valuation of LinkedIn at the time of its initial public offering (IPO) in 2011 to determine if the market valuation was justified by fundamentals or driven by social media hype.
- Analysis of LinkedIn's primary revenue streams (Hiring Solutions, Marketing Solutions, Premium Subscriptions).
- Evaluation of opportunities and threats within the professional networking and recruitment market.
- Benchmarking against competitors like Viadeo and Xing.
- Quantitative valuation assessment using multiple-based analysis (EV/EBITDA, EV/Sales, EV/User).
- Critique of the IPO pricing strategy and subsequent market performance.
Excerpt from the Book
LinkedIn´s Business Model at the Time of the IPO
Basically LinkedIn is another social networking platform, where people register with a personal account and connect themselves with other people.
If you dig a little deeper the insight will be the following: A users (private person) establishes a personal account with the information of his CV and requests to be connected to another private person/business associate. With the connection he is giving them access to his professional and educational background and messaging rights. So far so good, not that special, but ultimately, users form a kind of directory of not only these so called “first-degree connections”, but will see immediately an extended contact network, including the contacts of each of these connections. These are so called “second- and third-degree connections” (Rodriguez, 2014).
This means, if you are on a job hunt, your chances to find a person who knows a person that knows someone that has a job match for you, will multiply a lot! These connections can be exploited to get an introduction, whether to find a job or take advantage of a business opportunity.
Users can also follow companies, and will be notified if a new job offer is out. They can check who had viewed their profiles, and also bookmark the job offers for which they like to apply.
At the time of the IPO LinkedIn was one of the largest social networks, and probably the most mature/business professional one of the major social networking businesses. LinkedIn’s profit depended on several already known business models, like job boards, etc. (Hobart, 2011).
Summary of Chapters
LinkedIn´s Business Model at the Time of the IPO: Describes the platform's functionality and its three core revenue streams: hiring solutions, marketing solutions, and premium subscriptions.
LinkedIn´s Opportunities and Threats at the Time of the IPO: Analyzes the potential for growth through international expansion and network effects, balanced against risks such as copycats and infrastructure limitations.
LinkedIn´s Competitive Landscape at the Time of the IPO: Compares LinkedIn to specific analogs like Viadeo and Xing, as well as broader job boards and social networking/search engine giants.
LinkedIn´s Company Value – Multiple Analysis: Details the calculation of the company’s enterprise value using multiple-based valuation methods to assess market perception against financial metrics.
LinkedIn´s IPO – Brief Details: Outlines the facts of the 2011 public offering and discusses the market rumors regarding the potential underpricing of the shares by underwriters.
LinkedIn´s Share Value – July 7, 2011: Tracks the fluctuations in share price post-IPO to provide a final context for the valuation discussion.
Keywords
LinkedIn, initial public offering, multiple based valuation analysis, business model, hiring solutions, marketing solutions, premium subscriptions, enterprise value, competitive landscape, network effects, IPO pricing, tech IPO, valuation methods, stock market, social networking
Frequently Asked Questions
What is the primary focus of this research paper?
The paper focuses on evaluating whether LinkedIn's valuation at the time of its 2011 IPO was justified by its business model and financial potential, or if it was the result of a speculative social media market hype.
What are the core revenue components of LinkedIn?
The core revenue streams identified are Hiring Solutions, Marketing Solutions, and Premium Subscriptions.
What valuation methods were utilized in the analysis?
The research primarily employed multiple-based valuation analysis, specifically using EV/EBITDA, EV/Sales, and EV/User ratios by benchmarking LinkedIn against a peer group of comparable companies.
How does LinkedIn position itself against competitors?
LinkedIn positions itself as a unique fusion of a professional social network and a targeted job search engine, differentiating itself from both traditional job boards and general-purpose social networks like Facebook.
What is the main finding regarding the IPO price?
The author concludes that the share price was fundamentally justified given the statistics of future growth and the unique, lock-in nature of the business model, refuting the idea that the valuation was driven solely by market hype.
Which specific metrics are discussed regarding user engagement?
The paper discusses metrics such as the quarterly revenue per user and the importance of network effects, noting how user growth and engagement levels directly impact the platform's valuation.
How did LinkedIn's underpricing affect the company?
The text highlights rumors that the underwriters may have severely underpriced the stock, potentially costing LinkedIn and its initial shareholders significant capital compared to what a "fairer" market valuation might have been.
What role does the "freemium" model play in this study?
The freemium model is analyzed as the basis for LinkedIn's user growth, where the base service is free to capture volume, while premium subscriptions and other services monetize the professional user base.
- Citation du texte
- Katharina Wolter (Auteur), 2016, Was the IPO of LinkedIn successful? Valuation of the company and its business model, Munich, GRIN Verlag, https://www.grin.com/document/346955
