REV: JANUARY 6, 2012
Every once in a while, a company comes around that transforms an industry in such a way that investors have difficulty grasping just how big it may one day become […] We believe LinkedIn can be one of these companies.
—Morgan Stanley Research, June 28, 2011
On the evening of July 7, 2011, the price f or LinkedIn’s shares closed at $94. This closing price gave LinkedIn a market capitalization of $8.9 billion: 37.5 times its 2010 revenue and 592 times its 2010 earnings.1 LinkedIn, the 100 million member social networking website for professionals, had gone public seven weeks earlier. After an eventful first day of trading where trading volume had exceeded 30 million shares and the trading price had reached at one point $123 before closing at $94, LinkedIn’s price had gradually fallen to $64 per share over the following month. However, the price had subsequently recovered to reach the $94 mark again in July. (S ee Exhibit 1 for LinkedIn stock price chart.)
LinkedIn observers wondered if the company could possibly be worth that much or whether hype had overtaken reality. Market participants were excited because IPO activity had been slow in recent years and because no major social networking website traded as a public company. There was pent up demand for nearly any major IPO, but particularly for one in the s ocial media sector. While little information had been available throughout the 40 -day mandatory “quiet period” during which company insiders and IPO underwriters were prohibited from making public statements, providing forecasts, or issuing research reports, new information was starting to come out about the company. In particular, Morgan Stanley and JP Morgan—who had underwritten LinkedIn’s IPO—issued reports on June 28 with “Overweight” recommendations and target prices of $88 and $85, respectively.2 In contrast, Capstone Investments initiated coverage on July 6 with a “Sell” rating and a $45 target price per share.3
Reid Hoffman and four cofounders launched LinkedIn in May 2003 in Mountain View California as a web-based site for career management and professional networking activities. 4 Within a month of its founding over 4,500 members had joined LinkedIn. 5 The company began earning revenue by accepting advertising on its site in 2004 and by posting job listings and selling premium subsc riptions ________________________________________________________________________________________________________________ Professor Francois Brochet, and James Weber, Senior Researcher, Global Research Group, prepared this case. This case was developed from published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endor sements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2011, 2012 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1 -800-5457685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
in 2005.6 In early 2007, LinkedIn had nearly 10 million members when Hoffman first announced that the company had reached profitability in March 2006.7
LinkedIn attracted significant venture funding in its early years. This included $4.7 million i n Series A funding from Sequoia Capital in 2003, $10 million in Series B funding in 2004 from Greylock Partners, and a combined $12.8 million in 2007 from Bessemer Venture Partners and European Founders Fund.8 In June and October 2008, LinkedIn raised anot her $75.7 million from several funders including Bain Capital, Goldman Sachs, Bessemer Venture Partners and others. 9 The...