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Commentary

Linking Up with LinkedIn

Our first take on the social networking giant's IPO.

The first of the social networking giants will make its way to the public markets next week, as leading on-line professional networking site LinkedIn (LNKD) will attempt to raise $263 million from its IPO. The entire global investing community will have its eyes on this deal, and we imagine it will receive overwhelming investor interest and demand, making it one of the most sought-after offerings on the deal calendar in 2011. This deal is also important in another way, as it sets the stage for potential IPOs from on-line social platform peers Facebook, Twitter, and Groupon. We plan to unveil our thoughts on LinkedIn's valuation in the next few days, but until then, here is Morningstar senior analyst Rick Summer's high-interest initial take on the company:

LinkedIn (LNKD) - Capital Sought: $263 million; Offer Range: $32-$35; Fiscal 2010 Revenue: $243.1 million; Fiscal 2010 Operating Margin: 8.1%; Morningstar Take: High Interest

"LinkedIn manages a social networking website focusing on the professional user. The company claims more than 100 million users. Social networking is a hot topic among Internet companies and the investment community, and LinkedIn offers investors one of the first ways to get exposure to this industry. We rate this offering as high interest, as we believe that LinkedIn has reached some important milestones that have allowed it to construct an economic moat. Still, we suspect that overly exuberant investors will support an IPO price that is substantially above our own valuation and would not encourage longer-term investors to participate.

LinkedIn has three different sources of revenue, each of which is growing at a healthy rate. The largest source of revenue comes from Hiring Solutions, which enables employers to search for job candidates and post jobs to the Lin kedIn website. Advertising represents the second revenue stream. Advertising is primarily dependent on unique visitors and pages views at LinkedIn, and growth in traffic has supported a doubling of revenues in this segment versus 2009. Lastly, the slower growing premium subscriptions represented approximately 25% of revenues in 2010. Users can opt in for extra functionality including more robust searches and the ability to directly contact other LinkedIn users for a monthly fee, ranging from $19.95 to $74.95. We estimate that less than 300,000 users are premium subscribers.

In our view, LinkedIn's large community base and focus on the users and their connections builds powerful switching costs. As the largest professional networking site, users know where to get updates on their professional contacts, including job changes and other news. While we believe Facebook owns your social identity, LinkedIn currently owns many people's professional identity. If Linke dIn manages this trust relationship successfully, we believe it will be very difficult for other competitors to steal these users away. Focusing on these users is critical, as employers and advertisers will continually pay to reach these users if LinkedIn has the best data about their community and their connections.

In spite of these advantages, these heady times may be driving LinkedIn's valuation ahead of itself. At the midpoint range of 33.50, LinkedIn would be priced at more than 12 times 2010 revenues, and 76 times EBITDA. We expect our own fair value to account for operating leverage and robust revenue growth, but we are hard-pressed to view this offering as an attractive one for longer-term investors."