LinkedIn’s Valuation as Facebook of Recruiting Hard to Justify

LinkedIn’s (NYSE:LNKD) stock opened at $83 after its IPO was priced at $45 and is now trading around $100 implying that those select few investors that received stock allocations this morning are sitting on capital gains in excess of 100% on the first day of trading! Trefis launched coverage earlier today with a price estimate of $30 based on discounted cash flows, which we break down below. [1] The company competes with Monster (NYSE:MWW) in the recruitment services market, as well as social networking portals like Facebook and Twitter. The company also faces competition from Google (NASDAQ:GOOG) and Yahoo (NASDAQ:YHOO) in the online advertising market.

Our valuation is in line with the company’s earlier IPO guidance and slightly higher than the implied valuations at which LinkedIn traded previously on services such as SharePost and SecondMarket.

How LinkedIn Makes Money

Based on our analysis, we estimate that LinkedIn’s $3.2 billion valuation breaks-up roughly as follows:

1. Recruitment Services & Job Postings: $1.6 billion (48%)
2. LinkedIn Ads & Marketing: $0.9 billion (28%)
3. Premium Account Subscriptions: $0.5 billion (15%)

A Few Key Insights:

• Although LinkedIn is commonly described as a professional network, most of its value comes from the sales of subscriptions, job postings and recruitment services that make LinkedIn a very different investment compared to Facebook which relies on advertising. See our analysis of Facebook here.
  • LinkedIn had about 90 million registered members by the end of 2010 compared with an estimated 595 million registered users for Facebook.
• We estimate the number of job postings on LinkedIn were around 300K in 2010 compared to about 2 million for job site Monster.com. LinkedIn will have to grow job postings significantly over the next few years to support the valuation.
• We estimate that LinkedIn had about 250K of premium account subscribers in 2010 paying on average about $250 annually. We forecast that LinkedIn will grow subscribers to over 1 million by the end of the Trefis forecast period.

The Surprising Importance of Custom Recruiting Services

This recruiting services segment makes up nearly 50% of our estimated value for LinkedIn. The company offers advanced and custom recruiting services for corporate and business customers that pay on average an estimated $22,000 annually to LinkedIn.

These advanced services help businesses to maintain a presence on LinkedIn, post jobs, better find passive job candidates, better manage their recruitment process and collect information on who is interested in their business. As of March 2011, 73 of Fortune 100 companies used LinkedIn’s hiring solutions services. We estimate that the average number of LinkedIn corporate and business customers has increased from about 450 in 2008 to 2,700 in 2010 and we forecast that it will increase about 30,000 by the end of our forecast period.

Trefis Outlook Summary

Overall, LinkedIn will have to maintain the significant fees it charges to corporate and business customers while growing its corporate and business customer base significantly from a few thousand customers today to tens of thousands over the next few years. At the same time, LinkedIn will need to maintain or grow its job post pricing in the face of competition from a variety of sources (Monster, Careerbuilder, TheLadders, Dice).

Continuing to grow the LinkedIn member base, increasing the amount of information that LinkedIn members share and the freshness of that information will be crucial to maintaining demand from recruiters and business for LinkedIn’s services. By having the most comprehensive and up to date information on active and passive job candidates, LinkedIn will position itself to be a destination site for recruiters looking for highly effective, targeted job postings and advertisements.

See additional driver breakdowns in our full analysis for LinkedIn.

Note:

1. Our basic price estimate is $34 but shows $30 after accounting for stock option dilution. We use the Treasury Stock method to determine the net impact of option dilution.  LinkedIn has the equivalent of 16.2 million in shares outstanding in the form of employee stock options and these options have an average strike price of $5.86.  In other words, if someone tried to buy all of LinkedIn today, they would end up having to buy out not only the 94.5 million in class A and class B common stock outstanding, but also about 13.1 million in net converted employee stock options (based on the Trefis valuation of LinkedIn)