The Significance of the LinkedIn IPO

LinkedIn (NYSE: LNKD) went public on Thursday, amidst echoes of dot.com booms and busts from years gone by. The stock was issued at $45, opened at $83, briefly hit $120 and at the time of writing stood at just over $93. So what is the significance of the IPO for LinkedIn and for the technology sector as a whole?

Whatever you might think of the current value of the LinkedIn stock, it’s by no means certain that the success of their IPO signals a general bubble in technology stocks. A number of LinkedIn’s valuation ratios are at levels unlikely to be sustained by it or emulated by many other vendors.

Eye-Watering Ratios

LinkedIn’s current valuation of around $9 billion reflects 18 times projected current year revenues - compare that to Google, which has a price to sales ratio of a little over 5. The price/earnings ratio is even more significant - LinkedIn is trading at over 500 times earnings compared to Google’s 20. The market is clearly factoring dramatic growth into the model, at a level that you’ve got to wonder is sustainable.

These figures have fuelled inevitable speculation about the potential valuation of Facebook if and when it comes to market. But many believe that LinkedIn, Facebook and a handful of others are special cases and that their valuations are unlikely to fuel a “rising tide raises all boats” effect in the market as a whole.

A Selective Bubble

Now, I’m not a professional investor, and none of this should be taken as advice, but if we are facing a bubble, the evidence seems to suggest that it will be a selective one, and not one that brings us back to the madness of the late 1990’s in which companies without a sustainable business model saw their valuations dragged to giddy heights by a level of market exuberance that implied that the basic laws of economics had been broken forever.

Under the surface, LinkedIn actually has a pretty diverse revenue model. It earns money from both individuals and businesses, and through both subscriptions and advertising. So it’s not dependent on any single revenue source, although it is probably affected by the general health of the recruitment market than any other factor.

Diverse Business Model

Many companies find that LinkedIn offers a cost-effective alternative to conventional recruitment channels, and I think we can expect them to continue to attract converts to this new approach to hiring. Equally, many sales people are finding that the subscription options make it a useful tool to research and connect with potential prospects.

In fact, LinkedIn’s successful focus on business social media sets it apart from many other social networking sites. So the employees of other social media sites (apart from the likes of Facebook and Twitter) shouldn’t be anticipating a dramatic payday any time soon. And the rest of us are well advised to continue to concentrate on building scalable, repeatable, predictable and profitable businesses.

Investing the Returns

What can we expect LinkedIn to do with the proceeds of the IPO? It’s apparent in the run-up to the event that they have been launching a growing list of innovative service extensions like LinkedIn Today. I think - and hope - that we can expect this innovation to continue.

I also suspect that LinkedIn’s ability to precisely target advertising to narrowly defined audience profiles will become increasingly useful to companies of all sizes that have messages and offers to deliver to LinkedIn’s membership.

Of course, it’s also possible that LinkedIn will spoil what they have already built. Let’s hope not. How do you see the future of LinkedIn evolving? Was the IPO a good thing? Please share your views in the comments section below.

By the way, you can download an excellent infographic about the history and background of LinkedIn courtesy of the mashable.com site.

Caveat: The author has no shares nor (as far as he knows) any other investment interests in LinkedIn. Shares can (and almost always do) go down as well as up.