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Congratulations to Facebook Inc. for – 15 months later – breaking through its IPO price of $38 (U.S.) per share. With its shares falling as far as $19 at one point the renaissance feels exhilarating. But Facebook investors should avoid spoiling their glee by not looking at fellow 2011/2012 internet IPO classmates, LinkedIn and Yelp. Shares in those two companies have rocketed 400 per cent and 300 per cent respectively from their listing prices.
What is behind the discrepancy in returns? First, size and maturity. LinkedIn has about 240 million members for its professional networking and job search site. Facebook has already reached 1 billion global users. As such, LinkedIn's enterprise value of $25-billion is a third of Facebook's. Yelp, the restaurant and local businesses review website, is even smaller – it has about 100 million monthly unique visitors and, even after its stock price run, has an enterprise value of $4-billion.
But the relatively small size of LinkedIn and Yelp ignores the competitive advantages each has built. LinkedIn generates three quarters of revenues from employers and job seekers paying for premium products. Only the remainder comes from ads. Yelp is now becoming the winner in the race to own localised marketing (sorry Groupon) as well as online services, such as food delivery.
Facebook's most recent quarter, with a 75 per cent growth in mobile revenue, confirms that it too has a prime spot in the social internet landscape. On valuation, its enterprise value to revenue multiple is 10 times (14 times at the IPO). LinkedIn and Yelp are both trading at above 13 times. And given that Pandora – the internet radio station whose very business model is in doubt – is trading a fifth above its offer price it is clear that the sector is bubbly. So the risk is that the multiples of LinkedIn and Yelp return to earth even if their leading market positions are maintained.