The LinkedIn IPO has generated quite a bit of buzz lately, and from a look at the relationship between their revenue and operating cost, it’s not hard to see why: It looks like they may have entered a stretch of increasing marginal operating profit, which might support rates of growth that increase over time.
It does look like perhaps LinkedIn has had some trouble handling high rates of growth in the past, particularly in 2008, when operating costs increased sharply. Revenue and operating cost appear to pretty closely follow exponential rates of growth, but there isn’t a lot of confirmation that revenue is actually growing faster than operating cost… odds of success look about 50/50. Then again, if revenue really is growing faster than operating cost, at those rates, LinkedIn could experience extraordinary rates of growth. How long the growth might last is an interesting question. LinkedIn is large and well-known, but they are surely far from saturating the market for professional social networking services. I estimate that their revenue could potentially multiply itself by several times over the next decade.
Be aware that LinkedIn shareholders are selling only a very small percentage of its shares today. Their revenue growth is not a sure thing but appears to have quite a bit of potential for investors who are not risk averse. But given the small amount of cash that will be raised relative to its valuation in today’s IPO, it is a good idea to wait if you want to grab a piece of LinkedIn.
