Investment in LinkedIn pushes value over $2 billion mark

Posted on July 28, 2010 by admin

New York based hedge fund Tiger Global Management reportedly invested $20 million in Linkedln. The reported investment gives Tiger Global Management a 1% stake in the business social network.  The investment will value LinkedIn at approximately $2.28 billion USD, based on a purchased price of $21.50 per share for 1,050,000 shares in the private markets. The shares were reportedly sold by an existing investor of LinkedIn.

Tiger Global Management is no stranger to investments in online social media. Tiger Global made an investment in Zynga Game Network Inc, last December. Zynga, who is the largest online social gaming enterprise, is the creator of popular social games such as Farmville and MafiaWars.

LinkedIn was launched in May of 2003 and makes most of its money through its premium subscription business and serving ads on its free accounts.  The social networking site currently boasts over 70 million users.  With the majority of them being those with college degrees and higher and have professional backgrounds. The site is a relative lightweight compared to social networking counterpart Facebook, but given LinkedIn’s niche demographic of “professionals”, it does provide for an attractive investment by firms who wish to capitalize on the company that is expected to have an IPO within the next few years.

LinkedIn has raised over $76 million in the past two years from venture capital firms and various other investors.  Most of which still remains in the bank, and will be used for further development of “The world’s largest professional network”.

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What is Facebook Worth?

Posted on July 20, 2010 by admin

With a potential Facebook IPO looming within the first half of this decade, there has been much speculation as to how much Facebook is actually worth. Current estimates peg Facebook having a market value of $15 to 20 billion US dollars. With the company recently surpassing the 500 million users mark that would mean that each Facebook account is worth 30 to 40 dollars to the company. But is this reasonable? Many have argued that given Facebook’s current earnings estimates, that this valuation greatly overvalues Facebook. Below we have come up with a simple way to value Facebook.

The current annual earnings estimates for facebook range between $200 and $500 million dollars a year. This would imply that the value of Facebook is based on an earnings multiple of between 40 and 75 times earnings. Rapidly growing tech companies can fetch P/E ratios of between 25 and 40 times earnings, in the publically traded markets. Based on these historical trends and based on the mid-range ($350 million USD) of current estimates for Facebook‘s annual earnings we can place a price tag of between $8.7 and 14 billion USD. And to be safe yet again we can go with the mid-range of this estimate and finally peg Facebook’s market value at around $11 billion dollars.

The above described valuation is indeed a simplification in valuation. Given any other company with the same earnings and growth rate perhaps this valuation would be a little more accurate. But the fact of the matter is, is that Facebook is in a league of its own. .Its unique position as spear header of the social media revolution coupled with its global reach, in its 500 million+ users, has created a situation where there aren’t any other sites that Facebook can be compared too. This adds another dimension of difficulty in Facebook’s valuation. Facebook represents a new type of business. A type of business where the metrics for valuation have yet to be figured out.

As many who follow the industry may recall, in October of 2007 Microsoft invested $240 million for a 1.6% stake in Facebook. This investment would assign a $15 billion value to facebook. But was this move by Microsoft strictly a financial investment? For the most part, probably yes. But there may have been some underlining strategic reasoning to this investment. It could have been to block competitors out of Facebook and gain access to valuable information that Facebook processes about its users. All the intangible assets and resources of Facebook render much of traditional finance’s valuation models as useless.

It’s hard to classify Facebook as being undervalued or overvalued. We won’t truly know what Facebook is actually worth until the company goes public (one day) and its growth rate, both in terms of users and earnings, tappers off. Until demand for Facebook ownership finds equilibrium with the price that it’s offered at, whenever that may be, that’s really when we will know what Facebook is worth.

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Why Google shouldn’t pull out of China

Posted on March 31, 2010 by admin

What was first speculated last JanuaryGoogle China is looking to become a reality in the coming days. Google plans on ceasing operations in China amongst governmental threats made to Google by the Chinese government and the increasingly hostile environment Google operates in, in China.

Pros of Pulling out of China

A decision to pull out of China is not without good reason. There are moral issues at play in terms of a person’s freedom of speech in China. Google re-assures investors and stakeholders that its Chinese business only accounts for a small percentage of its profits. A move out of China wouldn’t significantly affect Google’s bottom line, at least for now. “Western” internet companies in China lack opportunities for business, because of Chinese law that requires content providers, such as Google, to obtain licensing. Thus making it difficult for foreign internet companies to operate without Chinese partners and subsidiaries.

Cons of Pulling out of China

We all know the significance of China’s growing economy to the world’s economy. We all know that China has the largest population in the world and showcase’s one of the fastest growing middle classes the world has ever seen.

The majority of Google’s profits are generated through search engine advertising. Advertising or in lamens terms, helping businesses connect with consumers, is the name of Google’s game. Not operating in China would mean that Google would not be able to reach almost 20% of the Earth’s audience. As China continues its staggering rate of growth, businesses will continue to pop-up and grow in China, helping to fuel the demand for advertising space.  Google needs to at least keep a foot in the door so they don’t miss these opportunities to do business in the fastest growing economy in the World.

Re-entering market

If Google completely stops operating in China, that doesn’t necessarily mean that Google won’t re-enter China in the future. Government regulations and censorship laws could foreseeably lighten up, in years or perhaps decades to come, as international pressure on China to adopt more global standards of freedom of speech and information flow continues to mount.

If such a scenario were to take place, then Google’s re-involvement in China could foreseeably happen. But re-entering the Chinese marketplace at some point in the future could be very difficult. Google would be at a disadvantage in China at its own game. Chinese search giant Baidu already has the largest market share in terms of search in China. Baidu would in effect monopolize the Chinese search business if Google were to exit. Taking away market share from a competitor that already is sitting on top of most of the market is hard to do and takes time. Chinese internet companies are far more popular in China than their American counterparts. Google needs to continue to operate in China if it hopes to become a truly global internet business.

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