With the launch of our new course, Social Media for Accountants, accountingcpd.net takes a look at how the financial world values the world of social media.
Social media is the new Golden Goose of Wall Street. Witness the crazy performance of LinkedIn's stock market debut last week. Launched at $45, the shares more than doubled in the first day’s trading, valuing the business at $8.8 billion or about 23 times the 2011 revenue, assuming first quarter sales are maintained through the rest of the year.
Last year the business did grow briskly, doubling its revenue to $243.1 million, but it makes very little profit: $3.4 million last year and it does not expect to make any money this year.
Facebook Inc., the world's largest social network, would be valued at about $94 billion using LinkedIn's multiple. Is it all mad or is there some logic to these extraordinary valuations?
LinkedIn is actually valued quite conservatively when viewed on a value per user basis, according to a PwC report, with a multiple below that of Virgin Media, Facebook and ITV.
However, value is notoriously difficult to extract from users. Murdoch paid $580m for MySpace in 2005 and grew its user base about 500% but he could not get sufficient value from it. By April this year he was looking to sell it for about $100m.
So how do investors approach valuing an internet company? A successful track record of monetization, either at the company or in its management, is helpful. But investors also need to dig deeper into how the business works.
How much time do people spend on the website? Many people use Facebook as an entry point for the internet, in much the same way they use Google. They spend almost as much time on Facebook as they do watching TV and advertisers want exposure to that user base.
Does that support a value of close to $9 billion for LinkedIn? Let's watch over the next year. The Golden Goose needs to lay a lot of eggs.
You need to sign in or register before you can add a contribution.