In their most recent quarters, Pandora and LinkedIn generated revenue $67 million and $121 million in revenue respectively. Both companies were operating at about break even. Pandora grew at a 117% year-over-year rate, and LinkedIn grew at 120%.
Both companies have their opportunities and challenges. In particular, Pandora needs to show that it can maintain healthy CPMs as it expands into mobile devices and/or run the risk of damaging users’ experience by introducing more audio ads. LinkedIn needs to demonstrate that it is capable of monetizing its base beyond job postings in order to justify its valuation, in my opinion. Nevertheless, both are exciting young growth companies.
Despite having similar revenue growth rates and operating at break-even net income levels, Pandora trades at about 7.8x revenue and LinkedIn trades at 15x revenue. One could give many reasons for the disconnect: market inefficiency (emotions), LinkedIn’s higher gross margins, broader revenue stream possibilities for LinkedIn, greater awareness of the LinkedIn brand, etc. I believe, however, the valuation difference is in large part a reminder that meshed networks like LinkedIn tend to be more dynamic and cost-efficiently scalable than hub-and-spoke networks like Pandora. Great businesses can be built through both meshed and hub-and-spoke networks, but meshed networks deserve a premium for their unusually explosive capabilities.
