LinkedIn Corp.’s (NYSE: LNKD) business model is supposed to be better than that of most other tech IPOs in the past year. The company has three lines of revenue: hiring solutions, marketing solutions and premium subscriptions. Each had double-digit growth in the second quarter.
LinkedIn has the profession social network business surrounded. It helps business people create communities. It also helps companies find workers. The success of the formula drove revenue up 89% to $228.2 million in the June period. The improvement of its stock price against the drop of the shares in other web IPOs has made the LinkedIn almost twice as valuable as Groupon Inc. (NASDAQ: GRPN) and Zynga Inc. (NASDAQ: ZNGA) combined. More improbable is that its market cap, at $10.8 billion, is more than a quarter of Facebook Inc.’s (NASDAQ: FB). Revenue is not it what it is cracked up to be once Wall St. begins to see the leaks in some company’s boats.
The point of how value is calculated among recent web IPOs shows the market’s reaction to the fact that Groupon’s revenue increased 45% year-over-year to $568.3 million in the second quarter 2012. The improvement on a percentage basis was not as strong as LinkedIn’s, but Groupon’s sales were much larger. The same holds true for Zynga. Its revenue of $332 million was up 19% year-over-year in the most recently reported quarter. Again, more revenue than LinkedIn, but Wall St. appears to prize a professional network above virtual farms. Facebook’s revenue for the second quarter was $1.18 billion, an increase of 32%. That growth rate, and concerns about its profit viability, brought its share price down to new post-IPO lows.
LinkedIn, in its own way, has taken a position similar to American Express Co.’s (NYSE: AXP) in the “old world” economy. Visa Inc. (NYSE: V) and MasterCard Inc. (NYSE: MA) have more customers. But American Express’s market cap is $63 billion to $87 billion for Visa and MasterCard’s $53 billion. Based on people who use their products, the market value numbers should not be so close. But American Express offers a series of services that span personal, business and enterprise users. Wall St. appreciates the balance, as well as the success American Express has had at the high end, demographically, of its market place.
Analogies between legacy businesses and newer ones often do not hold much value. In LinkedIn’s case, it has built what business school professors like to call a “moat” that none of its competitors or recent web IPO firms put into its class can match. Despite the relatively short span of the company’s history, Wall St. has already figured that out.
Douglas A. McIntyre