If you thought that sobered up investors would cool on LinkedIn
Instead of The Hangover's trio trying to retrace their steps to figure out the damage done in their drunken stupor a day earlier, this party's just getting started. Shares of the career-oriented social networking hub opened 8% higher this morning, clawing its way back to a nearly $10 billion market cap.
I was able to get in touch with Dominic Penaloza, CEO and co-founder of Ushi.cn. As China's top professional network, few outside of LinkedIn's freshly christened billionaires should be as pumped over yesterday's monstrous debut as the folks at Ushi.cn. After all, if the market loved LinkedIn, it may as well start loading the confetti shooters and balloon drop for China's LinkedIn.
Penaloza is naturally pumped about the niche, but he also has kind praise for LinkedIn.
"Although a lot of pundits voiced opinions that the valuation metrics are wild, I believe the monetization of LinkedIn has only just begun," he told me.
My passport is stamped with Port Punditry, but I can see where Penaloza's excitement comes from. If professional networks will disrupt the conventional recruiting tools through Monster Worldwide
Global domination has already been discounted at LinkedIn. What will it do for an encore?
I have three reasons to be wary of LinkedIn at this point, despite the promising fundamentals. Let's dive right in.
1. The market is limited
Facebook has more than 600 million registered users, or six times as many as LinkedIn's 100 million connections.
This isn't really a surprise. Facebook is a nostalgia machine and real-time gossip hound for the masses. High school kids, retirees, and most worker bees have no reason to warm up to LinkedIn's white-collared collective.
Bulls will argue that this is LinkedIn's strong suit. Advertisers will flock to the career-minded professionals with money to burn. I get that, but this is also the same crowd that won't fall prey to the movie trailers and fast-food ads that mainstream sites thrive on.
LinkedIn also is no slam-dunk to be a global juggernaut. Investors who think that LinkedIn has cornered the global market need to go out and see the world.
Penaloza points out that Germany's XING.com and France's Viadeo have been able to hold up well in their respective markets, despite LinkedIn's global intentions.
"Professional networking is a local thing," Penaloza explains, a point that holds especially true in his home turf.
"As for China, the local people require a local service," he says. "Ushi is made in China, made by Chinese, made for China."
He's right. Stateside search engines and marketplaces have failed to topple the hometown faves.
2. Today's IPO poppers are tomorrow's plungers
A "hot" dot-com IPO hasn't been sustainable in recent months.
- Content farmer Demand Media
popped after its January IPO, trading as high as $27.38 last month. It's gone on to shed nearly half of its peak value. (NYSE: DMD)
- Chinese social network Renren
traded as high as $24 on its first day of trading this month. The stock is down to the low teens today. (NYSE: RENN)
barreled in as China's leading video-streaming website. It has shed nearly a third of its value since peaking last month. (NYSE: YOKU)
In short, these stocks may have been popular for a few months, but investors began to bail long before their lock-up expirations gave insiders the same opportunities.
3. Valuation really does matter
We're not in an Internet bubble. When the world's leading search engine is fetching an earnings multiple in the teens, the chances of a sudsy collapse for the dot-com market as a whole is nonsense. We are in a LinkedIn bubble, though.
The "greater fool" theory is alive and well with folks who think they can buy a $10 billion company and sell it to someone else for $15 billion or $20 billion in the future.
LinkedIn earned a mere $15.4 million on $243.1 million in revenue last year. It's growing, but this is a company that will never have the fat net margins of China's lightly taxed enterprises. There's a material ceiling in terms of membership growth and global reach. It will also always be susceptible to traditional social networks and recruiting services that will want in on this specialty even more given LinkedIn's outlandish valuation.
Enjoy the party while it lasts, LinkedIn longs. Just make sure you're not around when the cops come to crash the kegger -- as they inevitably will.
What is LinkedIn's upside in terms of membership base and revenue? Share your thoughts in the comment box below?