Thursday, July 31, 2014

Linkedin results for Q2 2014

Continuation of my chronicaling the eventual collapse of LNKD's stock value.  Previous entry

Linkedin seems to have benefited as other social media stocks from high advertising rates, and possibly benefited from a strong quarterly job market and economy, to post reasonable sales relative to expectations, but quarter highlights include:

results
  • Yet another loss in "real" income terms.
  • sharp drop in mobile unique visitor growth over the last 4 quarters from 129% to 46%
  • Member page views that they report are down 2% over last quarter, and up only 22% over last year.
  • 13% year over year growth in their reported unique visitors.
  • Numbers from quantcast show even poorer results.  They show 20% decline in year over year unique visitors, and over 1B fewer page views in the quarter, with over 15% decline in page views.  Quantcast also counts people as visitors in an attempt to not double count desktop and mobile.  There was 15% drop in unique people using the site over last year.
  • No noticeable stickiness reported by Quantcast, in terms of visitors and page views for the China launch.
  • Market Saturation and continued decreased growth rates were also shown in: Corporate Solutions Customers, Premium Subscriptions and Talent solutions especially in US, members, and surprisingly online sales (indicating that LNKD is working harder cold calling customers rather than raking in self serve customers).
  • LNKD continues to spend about double on new equipment than it depreciates per quarter, and so long term profitability is further inhibited.

Guidance
  • 39% sales growth expected in Q3, and 33% sales growth in Q4.  Sharp deceleration.
  • Another loss is expected in Q3.  It is unclear whether they expect a loss in Q4.
  • For full year, depreciation will increase by 71% (10% of sales), and stock compensation by 57% (15%+ of sales), far outpacing sales growth and continuing to prevent profitability.  Purchases of new equipment is likely to be double the depreciation charge (increasing depreciation in next years substantially).
  • 126M diluted shares is going to be over 10% higher than Q3 last year, and 5% higher than Q4.

The core problem with linkedin is that they are not profitable.  Their sales growth is decreasing while their expenses are increasing at a faster rate.  If there isn't another world cup in Q3 2014, and/or job openings and advertising is impacted by sanctions with Russia, then next quarter could be the one where reality catches up to wall street.

I should mention the deeper problem of insider control, and the protection of Delaware laws, that prevents paying dividends, and any money to shareholders other than insiders, but getting back to the core issue...

Depreciation and stock based expense accounts for 25%+ of revenue.  Cost of revenue and sales/marketing at an additional $233M is an additional 44% of revenue.  At a 30% "contribution margin" (holding product development and general admin costs constant), it would take annual sales of $12B for a pretax profit of $3B.  $2B after tax.  But the thing is product and development and admin won't stay constant.  If they can be brought down from 29% to 20% of sales, then LNKD needs $30B in sales to make $2B of cash available to shareholders, which it will still choose to not pay them.  That is the type of sustainable future performance that would deserve a market cap of  $20B which it currently enjoys, but that sustainable future performance seems extremely unlikely and too far away.

September 2014 update: insider selling

Since the end of 2013, Reid Hoffman (Founder and Chairman) has sold 1.2M shares in 8 months (early august).  Leaving 14.489M shares held from 15.656M).  At this rate he will have divested entirely from the company in under 9 years.

Jeff Weiner (CEO) has recieved a mysterious 247k options in reference to a 2012 trust involving Reid Hoffman (dated filing Aug. 6), and received 93.2k employee shares/options in Mar. 4 filing.    Holds 1.027M shares/options as of Sept 3.  Down from 1.285M shares/options in Dec 2013.  He's sold about 600k shares, an amount that is  nearly 50% of his 2013 end balance.  As CEO he is most aware of the company's future prospects, and true current value.  And this amount of shares sold is an alarming divestiture over 9 months.

David Sze (Director) went from 167k shares in Dec 2013 to 65k on Sept 3 2014.   61% divestiture.

JK Scott (SVP engineering) On Aug 19, he had 58364 shares, and on Aug 8 had 37.5k options.   and received 57.4k shares/options on Mar. 4.  Held 121k shares/options in Dec 2013.  He has disposed of 83k  shares/options over the year.  Over 75% of Dec 2013 holdings.

Steven Sordello (SVP Finance) had 247.7k shares/options in Dec 2013.  Received 38.3k shares/options on Mar 4.  On Aug 19, he had 25917 shares and 194k options on Aug 14.  Compared to Dec 2013 balance, he has sold  26.7%.

Erika Rottenberg (VP GC & secretary)  had 30.9k B shares on Aug 19. and 43.6k A shares and options on Aug. 8. received 27.4k shares/options on Mar 4.  Had 86k shares/options in Dec 2013.  Disposition of over 45%.

Michael Gamson (SVP Global solutions) had 227k shares/options on Aug 19.  Received 38.2k shares/options on Mar 4.  Had 278k shares/options in Oct 2013:  Sold 32% of 2013 end balance in first 8 months of 2014.

Insiders have the best insight into the relative overvaluation of the company.  Insider sales were still quite strong during the 2nd quarter when the stock was around $150 or less per share.


Thursday, May 1, 2014

Linkedin and Twitter Q1 2014 results

Part of my running a series on linkedin results, updated each quarter, for the purpose of chronicling its eventual collapse.  Predictions from the last article mostly came true. Much of this article was written prior to linkedin's published results because the most relevant data is already known.

Linkedin will likely announce

  • 300M members (about 45% yoy growth)
  • decline in monthly visitors year over year.
  • 10% decline in page views
The above stats are sourced from quantcast, and translate into over 50% year over year decline in member engagment (pageviews per member).  An absolute disaster.

Linkedin actually reported comscore-based results for engagement that show a 7% or so increase in visitors, and 3% increase in page views.  Comscore excludes mobile traffic, while the quantcast includes it.  Last quarter's drop in mobile use continued this quarter.

Financial results 

  • a record net income loss ($13.4M) ($0.11)/share.  Trailing 4 quarters are now a net loss.
  • First ever operating income loss.
  • Continued decelerating revenue of $473M.  A 46% yoy increase.
  • A 38% growth forecast for next quarter, along with expected $9M loss
  • increase in diluted shares to 124.8M 
  • record low corporate solutions customer growth of 42% yoy and 6% qoq. +1400 corporate solutions customers, lowest since +1300 in Q1 2012.
  • 28% yoy growth in marketing solutions revenue per 1000 comscore pageviews to $8.27
Conference call admissions






  • the next few quarters, we expect some year-on-year compression in engagement comps
  • revenue will continue to be primarily driven by further penetrating the existing customer base (in context of talent solutions

  • The above admissions confirm the company's relative market saturation, and expected continued growth decline.  The focus on existing customer leveraging suggests that relatively soon (less than 8 quarters) , near 0 growth could occur.  You can upsell a customer once in a while at best.  Certainly, sales productivity declines as you attempt more.  There is also a limit to revenue per 1000 pageviews growth, and all increases generally harm pageview growth.

    Further Quantcast data
    • Even further deterioration in April.  About 10% yoy drop in unique visitors.  15% drop in pageviews.
    • No lasting apparent engagement impact from press releases of China launch.
    • 33% or so decline in mobile pageviews.
    • something to keep in mind are that daily active users are over 50x more at facebook

    Stock valuation
    I previously issued a grossly optimistic price target of $80/share in terms of enterprise value.  This will be lowered in the next paragraphs.  Keep in mind that no one should ever buy linkedin shares as long as there is no possibility of takeover, dividends, and management continues to be empowered to pay themselves the legal maximum.  These cautionary statements also apply to FB, GOOG, TWTR.  Their stocks are worthtless even if they might be relatively close to true enterprise value.

    The $80/share optimistic enterprise value ($10B market cap) is based on some reasonable hope that LNKD can sustainably earn $1B in annual net income.

    Linkedin has achieved peak sheep
    The sheep came to linkedin's pastures with the promise of rams providing them with love and children.  The rams (employers) came because they like sheep.  From its market valuation, linkedin's business model intentions are to power fleese the rams and sheep.  With its sales navigator platform, the apparent intent is to provide access to the sheep for wolves (spam marketers).  With its university program, linkedin has begun letting lambs and goats into the pasture.  (a possible explanation for low engagement new users).  The sheep may be disappointed with the presence of wolves and lambs.  The gate is not locked/closed, and if the rams want to solicit the sheep, they can email without causing any meaningful engagement with the platform.

    A major reason for the downgrade in enterprise value is that Monster.com or other job site can offer a platform for just sheep and rams.  The rams may prefer associating with a pasture that is more respectful of the sheep.  We should never value internet companies as if they were a 1980s cable TV monopoly with permanent sheep.  The number of sheep that have filled in signup forms in the last several years is not particularly relevant either.

    A $40/share or $5B enterprise value
    The extreme sharp drop in engagement raises significant doubt regarding the potential of $1B sustainable annual income.  $500M  may be more realistically optimistic.  There is now certainty that its model will eventually be disrupted, as it moves away from a job matching focus, and decline in engagement should seriously dampen any optimistic model.  

    LNKD cost structure
    Linkedin has no technology.  Meaning its systems are very simple to reproduce.  Every member it adds incurs database storage costs, and "relationship maintenance" costs.  Despite 5x growth since becoming public, it has never generated any material net income, and so the costs per user are not only constant worldwide, but if they provide no engagement, can contribute very little or negatively to the bottom line.  Using cost of revenue and depreciation numbers, it appears as though members cost LNKD $0.38 each per quarter.  Since Q1 2012, depreciation per member has risen almost 100% to 16.8 cents, and cost of revenue per member has risen 50% to 21.1 cents.  Even though technology costs (per storage size and speed) decrease over time, the cost of database operations scales between member growth and member growth squared.

    Linkedin's acquisition of Bright is to improve its job matching capabilities.  It may make the service better, but its unclear how it will improve revenues or profitability.

    If LNKD has already saturated its main target market of knowledge workers, then that cost per new user can mean very little future benefit to growth, if they will have low engagement and relevance.

    The similarities of Twitter
    Twitter also makes more sense at a successful $5B instead of its recent $25B.  While it doesn't have dual class shares that doom the stock to worthlessness, it still has concentrated ownership intent on paying itself maximum possible salaries, Delaware law, poison pill provisions to prevent takeovers, and predisposition to refuse takeovers.

    The most striking problem with Twitter is cost of revenue and marketing amounting to nearly 80% of sales.  (Its unclear if they include depreciation (which all internet companies should due to recurring computer costs/purchases).  LNKD is a more reasonable (but still high) 58% including depreciation, while facebook is at 40%.  

    Not only does twitter have massive losses, those metrics indicate that it needs to raise revenue by 400% before it breaks even.  It may be a great service with significant value to the world, but it may even be more easily disruptable than LNKD, and it has an even greater lack of technology.  

    While Twitter claims that its current massive stock based compensation is "only" related to its IPO, and will decrease in the future, Linkedin's executive compensation committee recently provided a generous increase, and we should have every expectation that Twitter will create a similar outcome.

    Can Linkedin ever make money for public shareholders?

    • It won't be in 2014.
    • If it pursued its objective of signing up all 1.5B global workers, (5x growth) It will increase its costs per user (depreciation + cost of revenue) by 5x to 8x to $1.90-$3.  If each user views 30 pages per quarter, and LNKD earns $10 CPM, then its potential marketing revenue is only $0.30 per user.
    • The above point casts the most serious doubt over its eventual profitability.  Its stated strategy is guaranteed to lose money.
    • Its certain that growing up to that point will take significant sales and R&D effort certain to prolong losses.  The marginal value of those 1.2B new users is certain to be lower than the existing 300M, and so even if sales and R&D are drastically cut after the goal achieved, no obvious prospect of profitability exists.  Sales and Marketing increased 150bp this quarter to 35.2% of revenue.
    • More generally, cutting sales and R&D after it has finished growing is going to signal competing ventures to take its share more cheaply than LNKD built it.  For example Mopub (owned by twitter) is competing with google's mobile ad network by not charging publishers anything.  It doesn't matter if there is no hope of profitability if investors are willing to pay Twitter founders so much for the illusion there might be.  Cutting sales and R&D at Linkedin would bring its price multiples down to MWW (Monster Worldwide (which used to be about 10)).
    • The only real possibility for Linkedin profitability is a cut in executive compensation.  The prospect of that is the same as Congress voting itself a 94% pay cut based on its 6% approval rating.  Linkedin executives have complete control of the company, and compensation committee, and will continue to pay themselves near the legal maximum.
    So, given its strategy and current deterioration, indicative of the saturation of its targetable market, there is a reasonable expectation that it will never be profitable.

    We should expect continued deterioration, and in the upcomming quarters it will probably miss its forecast, which will provide market realization of its value and potential.

    Thursday, February 6, 2014

    Linked in Q4 results - Should see collapse in stock price

    I am running a series on linkedin results, updated each quarter.  Predictions from the last article mostly came true.

    Q4 results

    • Revenue growth fell under 50% at 47%
    • Profit almost breakeven at $3.8M
    • Drop in Quarterly comscore pageviews and unique visitors
    • Year over year page views up only 8%, and unique visitors year over year up only 20%
    • Diluted shares outstanding skyrocketing to 125M.  Up 10M from last quarter.
    • Linked in recognizes premium subscription fees over 4 quarters from time paid, and this quarter marked the first sharp drop in growth rate, and so signals further decline.
    2014 guidance
    • Revenue growth of only 30%
    • Loss of over $60M
    • 65% increase to stock compensation over already absurd $194M level to $325M
    Comscore vs. Quantcast data
    • Unique visitors per week were, as with comscore, slightly higher than 2012 in the quarter until december, but up less than 20%, and down considerably from this summer.
    • Page views were down sharply for most weeks.
    • For January, visitors are down slightly from last year, and mobile visitors are down 25%.
    • For January, page views are down over 10%, and mobile page views down 40%.
    The worrying point for declines in January and Q4 is that at the end of Q4 2013, LNKD has 37% more members than it did at the end of 2012.  So visits and pageviews per member is collapsing.

    Linkedin's troubles and future strategy
    Linkedin was designed for professionals, and nearly all professionals have made a linkedin account, and so it has limited growth opportunity in the segment of people that have some use for linkedin.  Even with those people that have some marginal use for it, many are disappointed by linkedin's aggressive marketing email policy, and not clearly understood use of their contacts.  Joining linkedin can feel like handing over your contact information to viagra marketers.  Just like growth in a viagra email list doesn't provide any obvious profits to the viagra emailer

    Because their market is saturated, they are now padding membership numbers with kids (so they may link to universities).  They have committed themselves to try to sign up all 3B labour force members of the world, at great expense and yet another year of no profitability.  The strategy will not only be expensive, but its not clear that linkedin will provide any value to non-professional members, even if they are tricked into signing up, and its not clear that employers of non-professional fields will find any value in conducting hiring through social media. 

    How to value LNKD
    Linkedin is worth far less than the $25B reflected in a $200 share price.  In order for it to be worth as high as $10B ($80/share), you need a theory that it can make $1B/year in profits sustainably for say 50 years.  Such a theory could support a leveraged buyout at around $10B.  Without such a theory, that LNKD is one day profitable, then it's a mere stock scam, since its corporate structure has no accountability to outsiders, and it will not choose to pay dividends.

    Before it can make $1B sustainably, it needs to make $1B, and the next question is at what sales level it could achieve such a target.  Note also that profit means GAAP profit.  Not EBITDA bs.  Depreciation is a constant expense for LNKD associated with data servers.  Its generous stock based compensation has no reason ever to be reduced because insiders own most of the shares, and they enjoy unopposable great benefits from the policy.

    LNKD's current income from operations margin is 3%.  It was 6% last year.  Maybe they could cut a bit of marketing and G&A costs, and achieve a 20% margin, and so $5B in sales could support a $10B company value.  If sales go up 500M per year after 2014, the the sales level could be conceivable in 2020, but its most likely those sales will be achieved, as usual for linkedin, at maximum aggressive expense. 

    So, if everything goes well, it will take a few more years past 2020 for LNKD to reach profitability close to supporting an $80/share price.  The sustainability for a web site to maintain that profitability is questionable.  There was arguably never anything wrong with Monster Worldwide.  LNKD just outspent it to take its market share, riding the coat tails of a stock scam.  If it one day makes money, a fresher stock story will be appealing to take it down.

    Back in the distant past of Q4 2012
    After Q3 2012 results showing 81% sales growth, and the same to better profitability than it has been showing recently, the stock hovered around $100/share for the next 2 months.  LNKD does not appear at all to be healthier than it was then.  Whatever optimism supported $100/share then shouldn't support a higher share price today.  Especially not with 10% more shares outstanding.

    The only reason for enthusiasm back then was the belief that sales growth for LNKD would be perpetual and easy.  With a 30% growth forecast this year, a 15%-20% growth forecast for 2015 is optimistic, and  an expectation of return to high growth, completely unreasonable.

    Wednesday, October 30, 2013

    Linkedin Q3 earnings results

    This post is part of a series of documenting the eventual implosion of Linkedin's stock price, updated on a quarterly basis.  Last quarter's post

    Q3 results

    • It lost $3.4M in the quarter.  About what it guided last quarter.
    • While it beat its own revenue guidance by $20M, it provided no benefit to its income.
    • Page views and visitors dropped despite a 17M increase in members
    • Its slideshare subsidiary had an even sharper drop in visitors and page views..
    Q4 guidance
    • It is guiding only 40% increase in revenue over last year for the last quarter.
    • The lowered guidance from Q2 for Q4 is restated.
    • It expects a drop in page views and visitors again.
    • It expects another loss in Q4
    • Full year earnings per share will be lower than last year, despite a >50% full year revenue increase.
    • It will have increased total diluted shares to over 120M, from 112M last year (~8%)
    Speculating on why it remains unprofitable no matter its sales.
    • Many of its new members may be ghosts.  
    • Lawsuit this quarter alleges what is already widely known:  Linkedin hacks into your contacts and spams (sends) invitations on your behalf to everyone there.  
    • The spam can trick children into signing up with some difficult red tape to removing the account.
    • It has lowered its member standards to target 14 year olds so that they may link with colleges.
    • Even with its poor reputation for email ethics and privacy and systems safety, it has launched a mobile email service that grants linkedin full access to all of its users incoming and outgoing email
    • That it beats its own guidance for EBITDA but never for income effectively proves that it is either padding its revenue, or just pays its employees larger stock bonuses as a function of that increased revenue.
    The shady marketing practises exposed this quarter would be a likely explanation for an increase in members without an increase in visitors and pageviews.  Arguably, assuming the 17M new members all were unique visitors during each month, then linkedin lost 17M unique visitors from its previous members.

    Revenue per user dropped to $1.52 from the previous quarter.  That further supports the premise that they are running out of marketable new users, and perhaps just padding their user numbers with shady practices.

    Market cap of $30B is impossible
    120M shares at $250/share is not sustainable, because it presumes an evental $3B annual profit.  It previously stated its addressable member market as 500M members.  It is over 50% penetration.  While many of its members view it as legitimate as viagra penis enlargement ads, the first 50% penetration is necessarily easier and more potentially profitable than the last 50%, because the first 50% include those that find the service obviously useful.

    There is still no evidence that the recruiting fees market worldwide is over $4B in sales.  This also acts as a significant barrier to its future earning potential.  Until proven otherwise, its sales potential should be limited to 2 or 3x current levels.  Even if it stopped paying its management so much, and tripled its non-GAAP profit, as profit available to shareholders, $600M per year, is $5/share in EPS.  A $50/share price target.

    For the first time in their conference call last night, they mentioned thinking about the full 3B workers in the world as opportunity.  They are not making a profit on the core 250M people that currently find their service worthwhile enough to sign up, and are generally (higher paid) knowledge workers.  Theoretically these members should be more profitable than the marginal new member.  They currently earn $6/revenue (annual) per member, and 0 profit.  Acquring 3B users will be a significant cost, and continuous reinvestment of any contributions from profitable members into storing new accounts that are likely to just take up server space, and be annoyed by emails filling their viagra box.  It expects $135M in depreciation costs this year.  This is mostly computer and technology infrastructure costs.  Increasing users 10 fold will increase those costs 10 fold beyond LNKD's already steep user acquisition costs, and by doing so, it will arguably be chasing users that are even less profitable than its existing user base.  Furthermore any future reduction in costs/performance of future computers is offset by the database operation (computing time per operation) costs that will typically rise 100 fold with a 10 fold increase in database size.

    EBITDA and NON-GAAP earnings is not a useful metric
    Financial analysts that place any weight on non-GAAP earnings or Earnings Before Income Tax and Depreciation for linkedin make a grave error.

    Unlike capital intensive companies such as airlines,  mineral extraction, or car plants, which generally pay a large amount to start a project whose costs get depreciated slightly each year, Linkedin's depreciation expenses is for ongoing computer upgrades and expansion, and these costs are generally depreciated very quickly, and in some jurisdictions are allowed to be expensed.  Unless we expect it to stop renewing its computer infrastructure, their depreciation costs should be a core part of their operations and earnings.

    Linkedin also adjusts EBITDA to exclude the significant stock based compensation it awards itself.  Almost $200M this year, leaving profit for the year of a little over $20M.  The dilution this stock compensation creates directly harms any shareholder who is not receiving compensation from LNKD.  Because of the dual share structure that keeps solid control of the company with insiders, there is no possible pressure that would change its compensation policies.

    Other anaylyses on LNKD
    Commenting after LNKD issued over 5M shares in a secondary offering this quarter, was this detailed long term projection for the company and a resulting company value of $12B and $106/share.

    Most of the numbers are quite fair and optimistic at the same time.  The one major error in the analysis is assuming only 112M shares outstanding over the next 20 years.  LNKD is already up to 120M shares, and an optimistically low number of new shares would be 1M per quarter, and that results in 200M shares outstanding in 20 years.  So a $12B eventual company value is only worth $60/share.

    The other major issue with the $12B valuation is relying on operating income that excludes depreciation and stock compensation, and so for the next 5 years overestimates earnings by 7x.  So the $12B valuation relies on income that is likely to never be available to shareholders.

    The major issue with social media valuations
    Assumptions of $10B-$30B valuations on social media companies like LNKD or Twitter assume a world where users are monetized aggressively, and the users don't mind being monetized.  There also tends to be an assumption of a world where advertisers want to pay very high prices, and sell themselves on spending their money, and the social media company just has to staff enough people to answer phones and return email in order to collect all of that money.  Analyst valuations should be more considerate of the uncertainty of these assumptions.

    A followup with Facebook (FB) confirming the above point
    FB reported earnings a day after LNKD.  Impressive sales growth of over 60%, based on the strength of growth in its mobile advertising.  Much better than LNKD, However, they warned that there is not much more advertising that they can show users, and so their future growth is limited.

    Friday, August 2, 2013

    Linkedin in Q2, 2013 earnings (LNKD)

    Linkedin reported Q2 results last night, and the results should be interpreted negatively considering that there is no improvement since the previous quarter.  This is an ongoing series of articles where each quarter I track LNKD's results in an effort to chronicle its eventual collapse.  Here was last quarter's article.

    The one positive aspect of their results is that user growth and views was steady, and revenues were a few million higher than they told us to expect.

    Real earnings vs. Adjusted EBITDA
    Real earnings, GAAP net income, was about break even, and the same as last year: $0.03 per share.  The company, and analysts, like to focus on adjusted EBITDA instead of earnings, but depreciation is a real expense for the company as long as it will replace its computers one day, and the even bigger expense they "hide" through adjusted EBITDA is the massive stock based compensation.  Both its compensation program and depreciation are expected to continue, and they affect shareholders.  Only GAAP net income should be considered.

    Of note, it had forecast a profit of 0 for the quarter.  With revenue of $16M higher than forecast, it only made $3.7M.  Another reason to consider only net income as relevant is that it is always possible to increase sales without making any money.  Income from operations was down 35% from 1 year ago.

    Growth slow down
    Year over year revenue growth dropped to 59%.  It was 72% the previous quarter, and 80% the one prior.  This type of slow down should be reason for a drop in stock market price.

    Lowered guidance for rest of the year
    The high end of its guidance for Q3 is for 48% year over year revenue growth.  The high end of their earnings expectations is a loss of $4M in Q3.  These are poor expectations that should reflect poorly on the stock price.

    Linkedin lowered (slightly) its guidance for Q4 compared to guidance at the time of last quarter's results.  Previous top end revenue guidance was $1.46B, but after beating this quarter's revenue estimate by $16M, it raised its full year revenue guidance by "only" $15M to $1.475B.  Its forecast for Q4 is revenues of $413.7M is only 36% YoY growth.  Q4 top end expected profit is (Adjusted EBITDA is expected as $100M) $14.7M, with full year expected profit of $37M.  $14M of that profit will be from special tax rebates from Q1.

    These are very poor forecasts compared to its valuation approaching $28B, and a very rapidly declining growth rate.

    Under best scenario, LNKD is worth $10B ($90/share) in 10 years
    If Linkedin is ever to deserve a market value of $10B, it will need to one day reach net income of $1B.  In 2023, that means 20 to 30 times its 2013 income.  To understand why that would be an exceptional success you have to ignore growth rates.  Using its peak growth rate, we could project that the roman empire would cover earth 20 bazillion times by now.

    For Linkedin to triple its sales to $4.5B in 10 years would be a spectacular success.  Not only is that higher than the $3B total recruitment market estimated in 2011, which I addressed last quarter, there is a couple of other reasons to see it as a ceiling.

    Jeff Weiner (LNKD CEO) said yesterday that the company has a 600 million user addressable market of knowledge workers.  That is its maximum number of users.  As of this quarter LNKD is already past the 1/3 point with 238M users.

    MWW (Monster jobs) reported earnings in the morning, and though its revenue keeps dropping 10% YoY, it made 3 times the earnings of LNKD ($9M).  For what is likely the first time, LNKD's talent solutions revenue has surpassed MWW's revenue.  While its reasonable to hope that LNKD will continue to grow at the expense of MWW, that growth will get even more difficult and expensive.  If it already has half the market share, hoping that it can grow much more than double is too optimistic.

    Even if it manages to increase sales 3 times, it would still need to increase profit margins another 6-10 times in order to successfully hit a $10B market value.  It would do so through some price increases, firing sales people, stopping its content purchases, user acquisition costs, server infrastructure, service improvements (development), huge stock compensation, and funding whatever mysterious force keeps their stock price up.

    The problem that occurs for LNKD whenever it actually does make money, is that someone else can start a stock hype scam that offers recruitment services without making any money.  The someone else can be fired salespeople, and developers disgruntled they are no longer showered with stock option candy.

    Its also possible to get an optimistic 3 times sales rate in 10 years by projecting LNKD's growth rate out.  A flat 30% annual growth from 2013 levels will hit exactly 300% in 10 years.  That is a reasonable projection of its ongoing growth decline.  Because LNKD has been spending so heavily to chase its existing growth profile, its hard to see it achieving these growth levels while also becoming profitable.

    Linkedin's sales are almost 7 times what they were in 2010.  Its profitability this quarter was less than in Q2 2010, and its unlikely that next quarter will beat 2010 either.  Its fine to hope that the next 3x in sales growth leads to at least 3x income, but its hard to see LNKD's culture change to stop paying its insiders so much.  It needs to raise income by 30x, not just 3x, in order to justify a $10B market value.

    Market reaction to results
    All of the issues with LNKD's slowing growth (among others) were apparent last quarter, and the company provided no guidance of any improvement in the next 2 quarters.  After last quarter's results the stock fell to about $170/share.  So, there is no coherent explanation for it to trade near or over $200 after these results.

    2013 may reach close to triple 2011 sales for LNKD.  Excluding the Q1 tax breaks it received, LNKD is projecting full year net income below that of 2011.  Just because it may beat low expectations doesn't mean its stock price should be rewarded when they are set that low, and fundamentally, we need to wonder what sales levels might lead to profitability.

    DICE holdings
    DICE (DHX) is also in the online professional communities business with a focus on recruitment.  It is about 1/7th the size of LNKD, but its Q2 profit was more than double that of LNKD ($8M).

    The stock based compensation issue
    LNKD had expected $49M this quarter, and came in just under that by less than $1M.  It expects Q3 stock compensation of $49M and Q4 of $52M.

    The headline (non-gaap) earnings exclude these expenses and look better because of it.  But it is a cost paid by existing shareholders.  The $10B optimistic future market valuation worked out to $100/share just last year, when there were 100M shares outstanding.  Current shares outstanding are near 117M.  If somehow shares stop growing past 120M (around the end of this year), a $10B total value would mean $83/share.

    There is reason to believe that stock based compensation will never come down.  Linkedin has a dual-class share ownership structure where only the insiders have voting power.  There is strong incentive to award themselves extra stock.  While the company is projecting stock compensation to grow slowly, this is still growth in stock compensation while the company's sales growth is rapidly declining.  The best we can expect from Linkedin's management is for stock compensation to plateau.

    Tuesday, July 23, 2013

    Mathematically splitting ownership (sharing) of a car/coffee maker or any other resource

    Sharing a car can either be simple and unfair, or fair with any mathematical complexities managed through software applications.  This paper is using some simple every day sharing to illustrate important finance/organizational breakthroughs that apply and extend to the most complex organizational and social resource management purposes.

    Principles of fair ownership of a resource
    • Equal partnership or decision power: Any minority or less than equal decision power is equivalent to no decision input
    • Paying to the partnership per use, with competition for use handled by a bidding process.
    • Sharing of proceeds when resource is sold.  Sharing of proceeds from use fees.
    • Sharing of fixed costs such as insurance, storage, repairs.
    • Minimum use fee related to depreciation, maintenance and fuel associated to use.
    • Process for adding/removing partners either through bidding or some other determination of value.
    Issues with sharing a car
    Sharing a car (or plane/tractor/house/TV) has many potential inconveniences (costs) with the main offsetting benefit of lower individual partner expenses.  The main issue is that Friday nights and weekend carry much more desired use than Monday's 2am-4am, or Tuesdays 10am to 3pm.  Bidding for access to a resource allows for perfect utilization of that resource.  Because everyone is an equal partner, then losers of a bid receive their share of a winner's bid.  People who can schedule trips at off peak times can likely be able to the minimum use fee for actual costs related to use.  Bidding provides a contractual solution to shared resource conflicts.  The alternative of allocating the resource to those who nag, complain or yell the most is not a contractual (deterministic) resolution process, and the alternative of fixed time blocks is less flexible, and doesn't account for individual (potentially shifting) desirability for certain time blocks.

    Details of use bidding process
    * bids exclude the cost per mile (minimum use fee)
    * If someone wants to use the car from 2-5, while someone else wants it from 4-10, they need to outbid each other for the entire block.  Other bids from 5-7, and 7-10 would help the bid from 2-5.  Whichever adds up to more total revenue to the partnership would win.
    * If someone absolutely needs to know that they have control of the car on the 3rd saturday of august, or next saturday, or tommorow, then they would pay a fee (to the partnership) based on the length of time that other bids are blocked.  The fee levels can be preagreed and/or reviewed by partner vote for exceptional cases.
    * If someone wanted to take the car on vacation for 2 weeks, he'd need to outbid for the whole 2 weeks any bid for a single hour in that period, or make a proposal to the full partnership for the 2 week block.  Even if someone really wanted the car for a few hours in the period, there is likely significant revenue potential for the partnership in allowing the 2 week block rental, that the partnership would accept a reasonable offer.
    * Every partner is assumed to have the alternative of commercial car rental options, and so there is a cap to how much anyone will pay the partnership for use, and there are opportunities for those deprived (outbid) for the use of the car.
    * Partners would be allowed to resell their time slots/reservations.
    * If a booking is to end with the car transferred to the next driver outside of normal dropoff locations, then those 2 drivers should make a joint booking covering the full time that the car is to be away from normal accessible pickup locations.  They agree among themselves on how to split the total costs.
    * A policy to deal with drivers that are late in returning the car after use would include paying the partnership the higher of their hourly rental fee or the next partner's hourly rental fee, and pay the next partner the same amount for his inconvenience.
    * The partnership might allow non-partners to rent the car.  Charging a higher per mile fee based on increased risk of irresponsible care or theft, and insurance.  Partners might be given a $2/hour or $10/day bidding advantage over non partners.
    * If a partner is a victim of a crash while using the car, then regardless of whether he is at fault, he would be asked to pay the full share of any insurance premium increases, and a high portion of any deductible.  Some inner-partnership tribunal may reduce such penalties for instance out of fairness or partnership's failure if the cause of crash is say brake failure or worn tire blowout or zombie attack.  

    Work/chores surrounding the car
    Gas costs would be included in the per mile minimum use fee.  Filling up the tank might be an expected volunteer activity, or the partnership might pay any partner that chooses to refill the tank when it is under half full a fixed amount (say $1).  The actual cost of the gas would be treated as if the partner gave that amount to the partnership, and offset any use fees he has.

    Changing oil or tires, cleaning the interior are all jobs that likely many partners would be qualified to do.  A bidding process among partners together with commercial non-partner alternatives if they seem better than the bids received would determine who gets to do the job.  The cost is paid by the partnership, using the per mile and rental revenue.

    There may be a partner who is qualified to conduct advanced mechanical repairs.  And hopefully a few that are qualified to understand/supervise the process.  Bidding to supervise/approve repair jobs either from commercial outside or internal partners would be similar to bidding to do an oil change.

    Motivation to share ownership of a car
    A car can be useful, and you are unlikely to require it 24/7/365.  The main reason to share ownership is to have access while splitting the costs.  There can be several variations in individual motives, and these variations can cause conflicts or symbiotic benefits to partners.  One generality though is that every partner prefers that every other partner want to use the car in different ways than they do.

    Investor:  Someone who doesn't use the car at all could make money from the ownership.  He only pays for his share of parking and insurance, and unexpected repairs.  If many other partners compete to use the car, the investor's share of those revenues could be well above  his costs.

    Mechanic/worker: Like the investor, the car could be a source of work/income to a mechanic.  Other partners could subsidize their car use by ferrying the car to and from other partners.

    Light flexible users: By scheduling their trips only when other partners don't request the car, they'd pay only the minimum use fees related to fuel and depreciation/maintenance costs of the car.  Car poolers who just want to use it to get to and from work in a common area of town receive a convenient and innexpensive means of travel to get there that they both subsidize for other owners, and have their use subsidized as well through bidding exchanges.

    Heavy users: Those monopolising the resource by outbidding everyone else for prime time use, and blocking off entire days pay much more than other partners, but they pay much less than if they had to own the full car, and pay all of the parking, insurance and repair costs.  They also share in the revenue from the car when they are not using it.

    Conflict and opportunities among motives
    Heavy users will get frustrated if there are too many of them conflicting for the same time slots.  Investors may be delighted by this.  An obvious solution to the conflict that is in the interest of the heavy users is the partnership acquring a 2nd or additional car.  If the conflict persists, then the partnership will be collecting high rental fees, and so has the funds to acquire an additional car.  While it is possible that a majority of partners would have investor motives, and so it might seem wise to pre-agree conditions upon which the partnership would aquire additional cars, its actually unlikely to be necessary.

    The primary motive for entering the car sharing is very likely to include some desired access.  There are likely  better pure investment alternatives.  The mechanic/worker motives would definitely favour acquiring a new car.  The light users if their motives are mainly "free" use of the car would also favour acquiring a new car if their access is getting crowded out by additional users.  A major advantage to the partnership of a 2nd car is redundancy in having a backup when the main car is being repaired.  If access to the car(s) is too conflicted, then the partnership is unable to attract new partners.  New partners inject cash directly into existing partners pockets by paying for (a share of) both the current worth of the car, and regular costs of parking/insurance/repairs.  Since the natural purpose of the partnership was to have access to cars, there is a very strong confluence of interests to maintain access to cars, and so have the partnership acquire an additional car when needed.

    Another reason that pre-determining conditions for a new car acquisition may not be necessary, is that any group of partners can individually form an additional partnership for a new car using the funds from their share of the cash stash that is created in the partnership as a result of competitive use of the car.  Also, most of the existing partners are likely to want to join the new partnership anyway.  Even investment-motivated partners that want to block a new car acquisition on the grounds that it harms the profits of the existing partnership's intensely competitive car use, would see opportunity for the same to arise eventually in the new car's partnership.  Having a single partnership with 2 cars is more attractive to both existing users and potential new partners (compared to membership in either) because sometimes access to a van or pickup would be useful, and membership in 2 partnerships doubles the accounting, bills, voting for no reason.

    Continuing with the additional partnership option, heavy users starting a new partnership because investors wanted to block the partnership from acquiring a new car would still welcome the same investment-motivated individuals in the new partnership.  Investors aren't parasites.  They'd help share in the acquisition and other fixed costs.  If they never bid on the time slots you want to use the car in, then you drive whenever you want, and only pay the actual operating costs.  

    2 partners sharing 2 cars
    Some people value convenience and access more than anything, and would have a general reluctance to sharing a car.  But one person who owns a pickup truck and one neighbour who owns a compact/electric car could come together to share both cars.  The compact car would likely have lower per mile costs and be preferred for some trips.  Adding a 3rd investment focused light user partner might be attractive to these partners because it offloads 1/3rd of the costs, and is unlikely to impede their full access.

    Determining the minimum use fee
    Users bid on blocks of time, but pay in addition to that the costs of operating the vehicle.  Those costs are definitely higher than just fuel costs.  The simplest way to measure "wear and tear" into a per mile cost is to take the estimated value of the car now (say a 2008 honda with 50k miles), the expected number of miles driven in upcoming year (say 20k miles), and then estimate future value by looking at the current value of a 2007 honda with 70k miles (with worn tires).  The next year a similar assessment would take place taking into account any surplus/deficit over the prior year's estimate. Fuel charges and wear and tear can be billed as separate items.  A driver that returns a car with a full tank would not be charged fuel costs.

    Another guideline for setting the use fees is that they should allow generating a small surplus that avoids as much as possible the possibility of asking all of the partners for special contributions to repairs.  Most partners would appreciate the budgeting certainty that accompanies such a policy and predictable use fess over unpredictable demands for contributions.

    The one source of conflict over use fee settings is that heavy users who not only pay most of the use fees, but also likely pay high time block bids to the partnership.  Their self interest would not only favour low use fees, but the proposal that some of the time block fees be used to offset use costs.  The philosophy of using time block fees to lower use costs would be wrong and evil.  The purpose of the bidding competition for time blocks of use is to compensate the partnership (other partners) for your temporal monopoly of the resource.  
    While trying to use time block fees to subsidize and lower use fees is "evil", the time block fees do serve as a reserve for repairs, and so there is no need to inflate use fees just for the sake of protective anticipation of every expense (if there is a healthy stream of time block rental fees).

    Partnership additions and subtractions
    The topic of this paper extends concepts I developed in communal equity of businesses which mainly deals with adding and removing equal partners in a business setting.  The big difference when valuing a partnership in a resource ownership rather than a business, is that even if the partnership is receiving income from its resource, the value is purely tied to the market (resale) value of the resource.

    In communal equity valuation, the main mechanism for setting the buy-in price or sell-out price is to have all of the partners list their dollar value, and then choose the median price as the buy-in price, and for the sell-out price either use a discount percentage from that value or have an independent vote for that price.  This process is also available for adding/removing partners in a shared car ownership.  

    The process for buying in may involve considering who the buyer is in setting the price.  Someone mechanically skilled and wanting to contribute might be lured with a low price.  A heavy user with stereotypically irresponsible features might make some partners reluctant, but heavy users bring the partnership money, and the last 3 points of the "details of bidding" section deal with the risk of irresponsible behaviour.  The partnership has the security of a potential irresponsible partner's share, and if that partner is unable to pay restitution to the partnership, the share may be taken away.  If a car has 9 partners, then a new 10th partner pays 1/10th of the value of the car, and all the partners pay 1/10th of future fixed expenses.

    The process for selling out can be determined prior to buy in by coding a "right to sell out".  The advantage of giving every partner a right to sell their share back to the partnership is that it enhances the value of joining the partnership.  A partner may move away and be unable to use the resource in the future, or become unable to pay his share of costs.  A partner may feel persecuted or strongly object to a partnership decision or attitude.  The right to secession/divorce solves all democratic/political conflicts.  A formula for determining a right to sell-out price should be based on a distressed sale price.  Blue book values less 20%-30%, or a craigslist or other internet search less 5%-10%.  The right to sell out is a unilateral right given to every partner to impose a demand for money on the partnership.  It doesn't have to be at a generous price to be valuable and generous.  The existence of the right doesn't preclude a proposal for partnership vote on terms for a specific sell out.

    Software and technology
    Software tools for a car sharing service are fairly critical to simplifying the process and minimizing its time sink.  Software tools include a bidding reservation system, a member credits and dues accounting system, and a partnership democracy and proposal review system.  A bidding system is a mathematical process that resolves conflicts in under 1 second by outbidding.  The alternative of strongly worded emails or tribunals where parties accuse each other of "you got to use it last time, and its my turn" have no unbiased resolution mechanism, and are time consuming.

    Technology to account for miles driven, return of the car, could involve pictures of odometers, fuel gages,  GPS and clocks, but ideally it would be through an onboard car computer.  Lockboxes on the outside of the car could access keys, but ideally again, an onboard computer would require logins to authenticate who is driving, and track usage.

    It is possible to avoid any hardware (such as lockboxes, and car computers).  This is easier if all of the partners share a narrow location, but even without it, a human chain of custody for keys is possible.  Exchanges between the next scheduled user would occur, and a signoff on miles, fuel would be made.  If there is a time lapse between the next scheduled use time and the previous user's return time, other partners might rent the car for the (short) period that it is free, returning the keys in time to the next scheduled user.  Hardware has the advantages of not using people's time or requiring their scheduling availability, and increasing partnership revenue by tracking all usage and encouraging full time block rentals.  Hardware has the disadvantage of costing something, and may not be able to verify external damage to the car.

    I want to buy half your lawnmower, neighbour
    The above lowtech chain of custody is especially applicable to relatively low value items such as a lawnmower.  After reading this article, you could go to your neighbour and offer to buy half of his lawnmower.  The costs to consider are tracking fuel use, who does the refueling, and picking up or delivering the lawnmower to the next user.  Standard fees for delivery would lead to the simplification that if all partners do their own pickup, then no costs change hand as a result of pick up and delivery.  Some partners can make money by delivering the mower to the next user, and "btw, can I mow your lawn?" can be another source of income.

    After you buy half your neighbour's lawnmower, you can try selling 1/3rd of it to someone else, then 1/4 to another neighbour.

    Would you buy 1/20th of a lawnmower that is worth $100 for $10?
    I would.  Even if I am overpaying for my "real" share by double or $5.  The main alternative I would have would be to spend $100 instead of $10 for my mowing needs.  I actually don't have anywhere to store it, so I would happily make more money delivering it to the next user.  I also don't have an easy way of refueling it, or sharpening its blades, so that being taken care of is also a big advantage. I would be part of a network of partners that regularly produces offers to mow my lawn at a reasonable price without having me required to pick up or deliver the mower.  That 20 users instead of 1, reduces its life expectancy from 20 years to 1 or 2, doesn't bother me because it was probably going to get stolen or rust out before the 20 year period anyway, and we'll have a new better lawnmower within a couple of years as a result too, and I will only pay 1/20th the cost at that time.  If you asked me to pay $15 or $20 to join the partnership I would grumble, but would still say yes.

    For you, who started the partnership with your neighbour by paying him $50 for half of his mower, you might have charged the next partners for their shares $40, $30, $25, $25, $20, $20, $20, $18, $16, $15, $14, $14, $13, $13, $12, $11, $10, $11, $10 and your share of all of those partner sales would be $20, $10, $6.25, $5, $3.66, $2.84, $2.50, $2, $1.46, $1.25, $1.07, $1, $.83, $.81, $.73, $.66, $.60, $.55, $.50 which leads to you making back your full $50 after the 9th partner (while keeping 1/9th ownership), and all of the mew partners up to 20th. provide you with proceeds from ownership transfers of over $61.

    Natural sharing and consumer cooperatives
    Continuing my laziness for naming concepts, natural sharing of resources is a fine label for this concept.  Natural is a reference to a solution for mathematical optimality.  This concept is also very closely related to consumer cooperatives.  The primary purpose of the partnership is centered around shared consumption of a resource.  In addition to work being created for the partnership, there is also a consumer networking effect where the partners can cooperate and trade with each other.  In addition to lawn mowing service, there are car pools, and delivery favours.  The accounting software that tracks amounts due and from the partnership also allows the partners to transfer balances among themselves through micropayments.

    The office coffee maker
    One way to get a coffee maker into your organization is to lobby the bossman to buy you one with company funds.  There is no clear economic rationale to the organization for making the purchase, and the vocal opposition will object that degenerate drug addicts should not be supported in engaging in drug use at company expense on company premises, and any funds that are proposed for this drug paraphanelia should instead by distributed to non-drug-addict employees as raises.  This war is something the bossman must resolve.  There are two heated sides to a fairly irrelevant issue, and difficulty in achieving a consensus.

    There is a boring peaceful solution though.  Those employees that want a coffee maker should be able to pool together the funds to buy one, and the important point, without asking for permission.  They may come to a friendly agreement with the bossman for paying very little for use of organizational office space and electricity.  The argument for unmetered free access to electricity and office space is that it would cost the organization more in metering it, than ignoring it.

    The clinching argument for organizational support in allowing a coffee maker cooperative within the organization is that of strategic investment.  Investment without control or concern for direct (profit) benefits made for the indirect benefits it will provide.  In the case of the organizational coffee maker, the indirect benefits are productivity levels improved by shorter trips outside the organization, and allowing the slaves/employees to confirm their "deserved" freedom of having a coffee maker without needing permission.  There are costs to suppressing the coffee maker coop.  While there may be no labour regulations guaranteeing access to coffee makers, and theft of electricity and office space is a fireable offense, there are more productive uses of time than suppressing coffee makers.  For those of you puzzled at the absurdity of this discussion, consider the suppression of electronic cigarettes and bitcoin, then add corporate coffee shop interests in suppressing private coffee consumption, and authoritarian anti-labour groups suppressing the right of anyone doing anything without obtaining permission.

    The Office Pinball Machine
    With the strategic investment argument winning you a coffee maker coop, it works to get a pinball machine for the break room too.  The strategic benefit to the organization is that it will distract the slaves from their 70 hour workweek, and the clincher... Pinball machines are awesome.  For the investors in the pinball machine, the machine should keep its investment value because they aren't made any more, and because it comes with a built-in usage meter (coin slot), non partners can be allowed to play it, and the revenue should cover maintenance.

    Child Daycare
    Though much more boring and useless than a pinball machine (joke), daycare can be a valued service.  Daycare might be facilitated by an employer though subsidized location rental, and by having computers tied to the organizational network, child monitors could have some of their wages/fees subsidized by the employer if they are doing/available for work.  Regardless of whether any assistance at all is provided by the employer, cooperative daycare among a group of employees can be attractive for the cost savings, and networking connections that allow finding child monitors.  A bidding process can be more flexible than requiring every coop member to provide equal time commitments.

    Employee services without permission and lobbying
    Lobbying for employee services to the bossman has several problems.  Bribes, remaining budget, biases, friendships of the bossman will have influence on the decision.  If the organization happens to be an equal partnership that vote and bind the full organization through majority, both a pinball machine and daycare, have no direct relationship to the organizational mandate, and so should not be a decision where the majority forces a decision on the rest.  Those who want a pinball machine pay for it, and those who want daycare pay for it.  The organization may provide modest support that is much easier for a majority to accept.  The benefit to everyone is that both a pinball machine and daycare service may be adopted without even considering an organizational budget only able to afford one.

    The clearest example of this in city politics is when a developer or team owner proposes that a city pay for a sports stadium or casino.  The outcome is always bad.  Either an expensive crony development deal for the benefit of only those who will appreciate and use a sports stadium, or not having an awesome sports stadium.

    Natural governance
    Another commonality in the above partnerships are that all work is assigned based on a partnership vote for a package of a candidate, mandate and budget.  This is similar to my larger organizational/social governance model, I call natural governance, which suggests replacing elected kings and board of directors who then appoint all other positions, with the direct election of those positions, mandates and budgets.  The advantage is accountability in those positions.  A further refinement is that instead of electing heads of the FDA or EPA, we could "elect" (democratically determine) individual investigation projects within those agencies.

    Natural sharing without equal ownership
    Non owners can participate in the bidding process.  A single resource owner can still share it (or veto against sharing it).  The time rental bidding or agreed price and minimum use fee model still apply.  Unequal owners tend to create the same relationship as owner vs. non-owners.  There may not be much of a difference with commercial relationships, other than it can be more informal.  Worth noting is that when a partial owner has booked a block of time for the resource, then he is the exclusive owner of that block of time and can resell portions of it.

    Shared ownership of a human resource
    Freelance work can be imagined as self-owned.  Accepting a retainer is promising ownership of some of your hours to the one who pays your retainer, but maintains your freelance nature.  Accepting an employee position typically transfers ownership of your weekday 9-5 time to one employer, but it can also be viewed as a retainer for 35-40 hours per week.  A designer, engineer, or secretary can have multiple bosses within an organization in theory but this is considered difficult.

    Natural sharing of an employee or human resource's retainer can be achieved by making all of the department's that might use the resource equal partner's in that resource.  They are equally responsible for the payment of the retainer, but the minimum use fee is the hourly rate corresponding to that retainer, and bids among the departments are made against each other with the partnership receiving the winning bid.  Any time used above and beyond the employee's full time obligations or human resource's retainer is negotiated directly with the human resource with payments going to him.

    Generally, having multiple bosses instead of a single hierarchy in an organization is considered difficult because of the conflicts that can arise between bosses.  Natural sharing's bidding process solves all of those conflicts.  The human resource can have a share in his ownership in order to profit from competitiveness over the use of his time.  And/or the base salary can increase on a quarterly basis, based on how busy he is.  Those owners who are less busy, profit from the use of the resource by others.  There is no reason that shares in the human resource have to be from a single employer, as long as confidentiality among employers is respected.  If there is to be ownership of the human resource's time across multiple employers (as opposed to departments of a single employer) then it is important for the human resource, himself, to own a share of the resource, and allow, to his advantage, all interested partners to join in the partnership at the rate of his existing retainer fee.

    One very useful aspect of this model of employment is in situations where post project availability in technology projects is required.  Implementation, installation, bug fixes, support can require unpredictable time requirements.  But it can also permit a partnership or hierarchy (delegating to and training of junior "employees") of human resources to make itself available for "customer ownership" of their time.

    Interaction between work in shared ownership of resources and consumer coops
    The mechanic function can be performed by one of the owners in a shared car.  Or, several car or car fleet ownership groups can share the human resource that is a mechanic.  The latter can make more sense for a professional full time mechanic, while the former makes more sense for amateur/apprentice/retired/part-time jack of all trades mechanics.

    A co-owned mechanic resource can in turn co-own a set of tools and garage space housing those tools with other mechanics or tinkerers that need occasional use of tools.  A group of mechanics specializing in drive train repair and maintenance (most likely to be co-owned by customers due to eventual need) can in turn co-own one collision body and paint shop on the basis that those services require different tools.

    The costs to the owners of the mechanic are his fixed expenses including any compensation he wants for 0 work.  If the mechanic shares ownership of space and tools, then his co-owners only pay a fraction of those costs, and a fraction of the fixed costs associated with a partial ownership in a body shop.  When someone uses the mechanic service, the mechanic receives an agreed hourly rate, and payment for his share of the garage and tool use fees, and his costs if any for body shop services.

    The bidding system for mechanic services would primarily be based on jumping ahead of the queue.  Bids would still primarily be payments among the co-owners of the mechanic, but an associated bid for tool and space rental must also be covered by the customer-owner.  The bidder might also optionally offer a bonus to the mechanic for quick turnaround.  It makes sense to have a maximum bid which guarantees queue position, and a fairly chunky interval among bids.  For example there may be a $50/hr maximum rental bid that guarantees a position in queue (behind only other $50 bids).  A $5 interval between bids would permit a limited number of classes for work.  Work that was currently bid at $25/hr or higher would be permitted a 2 hour wind down time before being put aside to work on higher bid work.  If the shop is free for the next few hours, then a bid of $5 or $10 might guarantee that a job that takes 1 or 2 hours is completed without getting bumped for higher bid work.  When dealing with outside non-owner customers, any costs normally paid by owners when the facility is idle would be covered, and a fee equivalent to a bid provided to the partnership.

    Advantage for customers in co-owning a service
    Because the workers face no risk since all of their fixed costs are paid for, they can charge lower prices than if they had to buy space and tools upfront, and hope that they get enough business to pay for their fixed costs.  So the total amount paid to the worker-service by the customer owners is lower than it would be if a risk-adjusted price or profit margin was built into the prices.

    For a truck fleet owner that might be able to afford 1 full time mechanic, co-owning part of 3 mechanics might not only be cheaper, but provide them with the capability of fixing 3 trucks at a time.  Furthermore, its business focus is likely on making and shipping things, and so managing a mechanic or garage operation is a needless distraction.  In the same vein, such a company would likely prefer co-owning a shipping service rather than maintaining its own.

    Co-ownership also substantially reduces risk to the partners.  If they are not consuming the resource due to slowness in their business, then the co-ownership produces revenue for them.  If competition is very high, and a surplus generated for the partnership, then the surplus facilitates expanding the service.

    Advantage for worker in being co-owned
    A unionized position is likely to either pay more or offer better perks and vacations.  If the worker has a unionized position, he would not see much benefit in pursuing having his work co-owned, but unionization is increasingly difficult as technology advances and work is more competitive.  One popular alternative becoming fashionable for those underemployed is worker cooperatives, where the workers own an equal share of the business.  While that may be attractive, compared to being co-owned, the workers will need to raise startup capital somehow.

    A worker coop and co-owned worker can be compatible in several ways.  Several mechanics can co-own a garage and tools, where some or all of the partners are co-owned by different groups.  A group of co-owned workers can expand into a worker cooperative by reducing the hours available as a co-owned retainer.

    A group of mechanics sharing the same place is a source of networking, where people getting jobs can subcontract to others to complete or assist with the work.

    The one disadvantage of co-owned worker is potentially needing several customer-owners before starting.  Like the landmower ownership, starting as a single owner employee simplifies the process.  It may be in both the employee and employer's interest to obtain additional partners.  Approaching an existing garage can be an attractive partnership for people wanting to invent/build something, or private car partnerships that would repair their own car on weekends and late night.

    Worker's wages can go up more rapidly when more customers want to co-own and use his time compared to traditional employment.  It works essentially like having multiple competing job offers on his ability to negotiate salary.

    The relationship with basic income
    Political conflict between the left and right too often focuses on the question "Does labour or capital better deserve to oppress consumers?".  Consumer's having the right to organize production seems obvious.  They still need the help of capital and workers, and natural sharing or consumer coops still compensate for those roles.  Basic income (cash paid unconditionally directly to adult citizens) frees people from the requirement of a slavemaster as the motive for work.  Basic income also enables sharing as a consumer coping strategy because all of the partners will have the income available when dues are due, and it enables workers assisting partnerships and cooperatives for supplemental income if they are not otherwise busy. Basic income also enables starting businesses without immediate revenue opportunities, by relying on the income support.

    Global climate and environmental sustainability
    We can consider all humans equal owners of the planet's climate and ecological sustainability.  But we should also separate climate issues into distinct ownership plans.  Atmospheric carbon dioxide concentrations, ocean acidification, methane releases associated with permafrost thawing, desertification, and sub-arctic and antarctic glacier melting are all distinct climate challenges that require addressing, but not necessarily have a single solution.  The latter problem of polar glacier melting can be addressed narrowly.  We can block out the sun near the poles to cool them.  This might be considered an act of war by the few people that inhabit sub-arctic regions such as Greenland, and so a peaceful solution could involve the near billion people that would be affected by massive sea level increases, to chip in to the polar cooling dislocation fund.  A general problem with global warming discussions is that some people, organizations, and nations, would benefit from it, and a discussion model that allows them to "extort" a modest fee for their lost opportunities would be more productive than a model that permits their obstructionism under a facade of agreement.  Acknowledging the right to rape and destroy the environment is probably necessary to implement policies to save the environment by addressing compensation for the rapists, or at least excusing them from paying for their share of the solution costs.  It appears as though human-political nature requires calamitous circumstances before acting, but using a model of shared ownership could allow some of us to pay more for the costs of prevention, including the possibility of compensating those that might be opposed to action.



    Friday, May 3, 2013

    Linked in Q1, 2013 earnings (LNKD)

    Linkedin reported earnings last night, and I plan to write an article after each quarter for now on as a diary tracking how an impossibly valued company adjusts to its real valuation, and how the financial industry may attempt to distort and manipulate that valuation.

    Core maximum future value remains below current price
    The total recruitment market was last measured 2 years ago, at $3B.  Even if that grows to $4B, linkedin is suited to only the higher end job portion of that market.  If it is paid $200 per job, it needs to place 15M jobs per year in order to generate $3B in sales.  A couple of months ago (end of article), I estimated worldwide online job postings at below 8M with many of the postings having fees much lower than $200 including free.

    So it is hard to understand how LNKD could ever reach as high as $3B in core sales, and $1B in annual profits, and so a maximum corporate future value of $10B, which is a maximum future share price of below $90.  Considering the risk of failing to reach that maximum, a $45/share or below current price is appropriate.

    The lack of takeover or dividend potential
    The true value of a share of stock can only be measured by the payments that share is entitled to receive:  Dividends and takeover bids.  If a company is too large, and too highly valued, with no real cashflow stream then it cannot be taken over at a price near its current value.  Similarly if its structure discourages ever paying a dividend, its stock value can only be measured based on significant deterioration in stock price that is necessary before management considers selling or issuing a dividend, and a price that buyers can rationally consider the whole company based on cashflow.

    LNKD meets all of these overvaluation criteria, as it has tightly controlled dual class shares.  A related issue is that it uses that concentrated control to issue extremely generous stock compensation to itself (and employees).  Its irresponsible for the financial analyst and media industries to ignore that compensation in its results.  That compensation has a real effect on the valuation of shares for both takeout and dividend purposes as well.  The below $90/share ($86.65 = 10B / 115.4M shares) maximum future value is based on current shares outstanding of 115.4M.  Just 18 months ago, that same $10B maximum total future value translated to over $100/share because the shares outstanding were 98.8M.

    Linkedin estimates that it will award its insiders $195M in shares this year, and that number excludes the 512k shares it is giving out for its acquisition of Pulse.  The share issues are the main reason it has never been profitable, and there is no reason for it ever to stop issuing nearly all operating profit to insiders, because it has complete insider control of the company, the support of the financial analyst community, and the support of state of Delaware.  That future stream of insider share giveaways further reduces any maximum future share value estimate.  There is no reason for LNKD's management to ever pay all shareholders through a dividend when it can be applauded by the analyst community for paying itself.

    Linkedin forecasts
    For the next quarter, Linked in is forecasting year over year sales growth of about 55%, and core (after depreciation and stock compensation) earnings ranging  from a loss -$6M to 0.  For the next 3 quarters, it is also forecasting year over year sales growth of 55%, and core earnings range of $-21M to $4M.  A significant slowdown in growth is occurring in non-US markets.

    Declining sales growth
    Even if LNKD beats its own estimates considerably and achieves 60% growth, it would be a significant drop from 2012's year over year growth of 81%, and this quarter's 72% yoy growth.  It would also make the most reasonable optimistic estimate for 2014 growth to be 45%, and 2015 growth nearing 30%, even if you make the mistaken assumption of an infinite addressable targetable sales market for Linked in, instead of it approaching its potential penetration cap.

    With declining sales growth and no real earnings, even with the mistake of assuming an infinite potential market, valuing the company at over 14 times 2013 sales ($202/share) is not close to reasonable.

    Comscore vs. Alexa metrics
    Another peculiarity of Linked in results is that it reported a healthy 13% quarter over quarter increase in comscore internet metrics for use and pageviews, but Alexa's more transparent internet monitoring service shows no change in the last 6 months for Linked in's pageviews, time spent on site, and reach.

    I can't explain the difference, but someone should be explaining it.

    The future of employment and robotics
    Relevant to linked in's value 10 years from now, and so its real value today, is how robotics might transform employment.  General purpose personal robots are closer than we think, and it not only ends many types of employment, it ends the need for most types of factories.  The main reason personal robots will arrive soon is that they are cost effective if they can be transformed into self-driving electric cars as one of many potential transformations, and widespread adoption of standardized components makes programming and sharing the programming of the robots cost effective and easier, much like computer and phone apps are easier and cheaper because there is a large market available to share them.