LinkedIn Wants $32-$35 per Share. Did Someone Say Bubble?

Last Updated May 9, 2011 2:40 PM EDT

LinkedIn continues its march to its initial public offering. The latest detail is that it will price its IPO at between $32 and $35 a share for a $3 billion valuation. However, given the realities of the company's business, it seems only reasonable to ask what people were smoking when they set the price. The answer is pretty obvious: bubble bath.

In LinkedIn's S-1filing, financial statements suddenly made clear that years of claimed profits were just a sham. Not as bad as the creative pre-IPO profit creation of Demand Media (DMD), but still, not a profit. On repeated questioning from various media outlets, company representatives claimed the company was profitable from 2006 through 2009, although it really only achieved that -- barely, too -- in 2007.

According to LinkedIn's latest amended S-1 filing, the company saw $15.4 million in net income in 2010 (click to enlarge):


In the first quarter of 2011, LinkedIn increased its revenue by 110 percent year over year, and yet its income from operations was only 40 percent that in Q1 2010. Cost of revenue increased at about the same pace as revenue, as did product development and general and administrative. But marketing almost tripled in size. If there are some economies of scale in this business, they've yet to show themselves. It has gotten expensive to attract people.

Why? As BNET's Jim Edwards pointed out, LinkedIn added some scary lines to its S-1 that explain its underlying problem:

The number of registered members in our network is higher than the number of actual members because some members have multiple registrations, other members have died or become incapacitated, and others may have registered under fictitious names. Given the challenges inherent in identifying these accounts, we do not have a reliable system to accurately identify the number of actual members, and thus we rely on the number of registered members as our measure of the size of our network. Further, a substantial majority of our members do not visit our website on a monthly basis, and a substantial majority of our page views are generated by a minority of our members. If the number of our actual members does not meet our expectations or we are unable to increase the breadth and frequency of our visiting members, then our business may not grow as fast as we expect, which will harm our operating and financial results and may cause our stock price to decline.
LinkedIn can't tell how many customers it actually has and, more importantly, relatively few of them find the site of enough interest to visit even on a monthly basis. The only way to build a stronger business base is to find services that consumers will find useful. Until then, it will take marketing dollars to keep the cash flowing.

Right now, LinkedIn revenue comes from companies that pay to recruit employees, but that line of business will face increased competition from Facebook. (Or take a beating if the economy turns south.) Given that LinkedIn shares were going for $20 each on a private market in January, the value has sure bubbled up in just a few months.

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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.