Does Groupon See LinkedIn in the Mirror?

A girl can be too beautiful, a student can be too smart, and an IPO can get too hot. As Groupon (Nasdaq: GRPN  ) finally goes public today, it may want to be taking notes of what's happening with recent darling debutante LinkedIn (NYSE: LNKD  ) this morning.

The white-collar social networking site posted blowout quarterly results last night and jacked up its guidance for the current quarter, but the stock opened 7% lower after deciding to dilute existing shareholders with a secondary offering.

LinkedIn's quarter itself was a beauty. Revenue climbed 126% to $139.5 million. The dot-com speedster's bottom line checked in with a loss of $0.02 a share -- or a profit of $0.06 a share on an adjusted basis. Wall Street was banking on a deficit of $0.04 a share on $127.6 million in revenue.

Corporate-minded networkers keep flocking to the site, as comScore shows an average of 87.6 million unique monthly visitors during the quarter, 64% ahead of where it was a year ago. You see how revenue is growing nearly twice as fast as its user base? That's LinkedIn excelling at milking more out of its users.

This doesn't mean that LinkedIn is installing tollbooths. It's still a very free site. Premium subscription revenue generated from a sliver of its base paying for enhanced features is just 20% of the company's revenue mix. LinkedIn is simply making a lot more money with its hiring and marketing solutions as targeted ads and premium services for recruiters take full advantage of the social networking website's magnetism.

I was skeptical when LinkedIn went public earlier this year as a $4 billion company at its $45 IPO price that ballooned quickly to a nearly $12 billion valuation at the peak of its first day of trading. I felt that investors should turn to more reliable Web-savvy site operators. Monster.com parent Monster Worldwide (NYSE: MWW  ) , tech community hub Dice (NYSE: DHX  ) , and China's 51job (Nasdaq: JOBS  ) offered proven growth at more feasible valuations.

Well, I won't knock LinkedIn now. It has more than lived up its end of the bargain by dramatically beefing up its operations. It also only helps that the stock has shed more than a third of its peak value, though its $8 billion price at today's open is still not ready for primetime for investors who want to sleep comfortably at night.

Unfortunately, LinkedIn is showing its true colors right now. In order to smoke out heavy demand when it went public six months ago, LinkedIn limited the number of shares it offered to the public. Holding back on supply helped intensify demand. With the stock still well above its original $45 price tag, LinkedIn is flooding the market with $100 million worth of freshly minted shares.

Don't be surprised if Groupon does this exact same thing. The daily deals giant scaled back its IPO to play the same supply vs. demand trick as LinkedIn. If Groupon's stock is still buoyant early next year, no one will be shocked by a secondary that will either be dilutive or an opportunity for insiders to cash out at higher prices.

This is a lesson to any investor chasing a hot IPO. It's OK to pay up for a promising growth stock when it goes public, but always question the puppet strings that come attached with your stock certificates.

If you want to check in on what the corporate-friendly social networking site is up to, add LinkedIn to My Watchlist.

Motley Fool newsletter services have recommended buying shares of 51job. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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  • Report this Comment On November 07, 2011, at 11:21 AM, naughtyguy wrote:

    When someone becomes a groupon subscriber they might tend to jump on a lot of good deals. After accumulating a bunch of coupons they will have to slow down buying them so they can use the ones they already bought. No doubt it is a good deal for the coupon purchaser, but the businesses lose money with these coupons and will lose interest as they find other forms of advertising more profitable. IMHO

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