What Does The LinkedIn IPO Imply About The Value of Facebook?

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The recent IPO of LinkedIn clearly illustrated the public’s infatuation with all things social.  The company ultimately priced its IPO at $45 a share after raising the range due to high investor demand.  Within its first day of trading the stock reached a high of $122.69 leaving the company with a market cap of $11.6B!  The stock has retreated (closed at 75.91 on 6/8), but this still leaves the company with a remarkable $6.9B valuation.  How can a company with ~$240M in annual revenue and operating profit of less than 20M be valued at such a level?  Clearly the company is valued not on existing financial performance, but rather on the strength of its user base.  If LinkedIn reaches such a valuation on its user base, what does this imply for Facebook when it ultimately goes public with a user base significantly larger than that of LinkedIn?

uvs to linkedin vs facebook

By creating a valuation algorithm based on online consumer behavior we are able to back into an implied future Facebook valuation.  We know this is a simplistic exercise that does not take into account many other important factors when looking at the health of a business, but it is an interesting framework nonetheless.  The valuation algorithm we will use is:

(Monthly Unique Visitors * (1+ Annual Growth in Unique Visitors) * (Average # of Monthly Visits Per Visitor + Average Time Spent Per Visit in Minutes).

This enables us to value LinkedIn on three particular parameters related to its user base – size, growth, and engagement.  The combination of these three variables tells an overall story of the value of a user community that UVs alone cannot tell.  By applying the algorithm to LinkedIn we see:

16.2M * (1+.2) * (3 + 6.9) = 192M.  Thus, with a valuation of 6.9B we are left with a factor of 35.9 (6.9B/192M) that we will leave constant when analyzing Facebook.  By applying this algorithm to Facebook we see:

138.0M * (1+.13) * (23 + 20.7) = 6.8B.  After applying the factor of 35.9 we are left with an implied valuation of 244B!  While this ultimately might be too high for a Facebook valuation, this exercise illustrates that if the frothy LinkedIn type valuations persist until Facebook taps the public markets we will see an IPO of unprecedented proportions.  Facebook dwarfs LinkedIn in not only size of its user base, but in the deep level of engagement typified by its users.  Facebook visitors come to the site on average 23 times a month compared to 3 for LinkedIn and spend 20.7 minutes per visit compared to 6.9 for LinkedIn.  Definitely exciting times in the land of social media.

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  1. Geoff

    Your algorithm ignores the purchasing power of the user-base — which is considerably higher for LinkedIn’s users. For ad-driven business models, that seems like a crucial metric.

    Reply

  2. Lindsey

    Great insight.

    It’s also interesting to think about is the worth of the self-reported information? On the surface facebook may have a lower income rate across users, though there’s a lot of value potential in the information they freely post. Everything from products and companies they “like” to overall behavior and consumption patterns.

    Here’s a link to a recent TED talk that also talks about how self-selecting the data feeds can become: Beware of online fliter bubbles

    Which begs the question: If the ad models were systems that gave up-selling recommendations based off of data you’ve already provided and what value can we attribute to that?

    Reply

  3. Dk

    It is a pointless comparison. Other than being “social” they share very little in terms of business model. Fb is all ads. Linkedin’s biggest source of revenue is corporate recruiters.

    Reply

  4. WhatYaGive

    “I likened LinkedIn to a Chamber of Commerce mixer – a place that is intended for networking that is all business. And I described Twitter as a huge party, where every conceivable type of person with every conceivable interest is available for you to mingle with and get to know.

    Facebook, in my analogy-driven mind, is like a neighborhood block party. At a block party, the streets are closed off, and the only folks who will be welcome are those who live in your neighborhood or were invited by you or your neighbors.” – hildygottlieb

    Reply

  5. Carter

    This algorithm makes no sense to me. In particular, the term (Average # of Monthly Visits Per Visitor + Average Time Spent Per Visit in Minutes) doesn’t correlate to anything real. It implies that if I visit the site 29 times a month, each time for 1 minute (for a total of 30 minutes on site), that’s equally as valuable as visiting 5 times a month, each time for 25 minutes (for a total of 125 minutes on site).

    Am I missing something? Is there some way to explain the existence of this term? If not, it seems like this is less of a “model” for valuation and more just playing with math find a bunch of numbers.

    Can anyone explain this? Thanks.

    Reply

  6. facebook emoticons

    The recent IPO of LinkedIn illustrated vividly the public enthusiasm with all things social. The company eventually its IPO to $ 45 per share to increase the range by the high demand from investors favorably.

    Reply

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