Jag Venugopal's Blog

May 20, 2011

LinkedIn worth $10 Billion?

Filed under: Information Technology — Jag @ 6:28 am
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Like many professionals, I too have an account on LinkedIn, and have managed to link up to some 200+ contacts. LinkedIn is an excellent networking resource and its value grows as more people use it. Similar to most people, I have a free account, and little need for the extra features available to paying customers. Every so often, LinkedIn flashes an ad at me, from which they presumably collect a few cents.

Even with all that said, I am hard-pressed to figure out how LinkedIn could have a $10 Billion valuation. Assuming a P/E ratio of 50, which puts it in the momentum investing category, we’d still need to see earnings of $200 million to justify such a valuation. According to various websites, LinkedIn’s earnings are somewhere between $8 and $15 Million. That would put LinkedIn’s P/E ratio at around 1250. Which, give or take, is about 52 times the P/E ratio of companies comprising the S&P 500. Even if LinkedIn had a great product, sold advertising by the truckload, and did a host of stuff such as being a better version of Monster.com, its hard to imagine how the company would justify such valuations.

My money is on LinkedIn rising temporarily, then plateauing and falling, and finally becoming a takeover target for someone like Google, who can then use the LinkedIn network to make a big push into job ads. But then again, I thought Google won’t go too far and how right was I on that?

Update: According to The Atlantic, LinkedIn has the highest P/E ratio of any stock, anywhere (though not sure if it is historically the highest P/E ratio.). Tulip mania all over again!

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