Friday, May 4, 2012

LinkedIn valuation

LNKD reported Q1 2012 results last night, and looks to trade around $120/share as a result.  There are a few abuses of reporting which may be fooling investors:

Non-GAAP EPS as a headline, and undiluted GAAP EPS as secondary headline.
This is enabled by stock promoting media, but the big exclusion in non-GAPP earnings is its stock (option) based compensation.  Diluted (GAAP) EPS was $0.04 compared to the headline of $0.15.

Sales go up every quarter, but earnings don't
LNKD net income has not gone up since 2010.  They are adding $20M in sales each quarter, but also adding $12M in sales and marketing expense.  Other expenses keep making up the difference.  Job sites can behave unethically by advertising fake openings in order to entice more members.  If investors only care about a company's sales growth, then there is potential abuse possible by booking fake revenue.

Forecasting a slight loss to break-even for 2012
Forecasting 172.5m in adjusted EBITDA for 2012, which excludes its stock based compensation, they're also forecasting up to $175m in stock compensation and amortization expenses, and mentioned in their conference call that income taxes would equal net income for the year.  So the trend of "buying sales" is expected to continue for 3 quarters.  Its upward revision of sales forcasts includes its announced acquisition of slideshare.

Comparisons to OPEN table
In my analysis of Opentable last year (trading at the time near $120, and around $36 today), I criticized it for its valuation relative to its total potential market, the (ease) threat of competition, and the rapid shareholder dilution that was likely to continue.  A problem that Opentable did not have compared to LNKD is that at least its income was growing with sales.

  • LNKD expects its diluted shares will grow another 3M to 115M by the end of 2012.  About 6-7% for the year.  Diluted share growth almost entirely consists of management/employee compensation, and is one of the abuses of shareholders that natural finance addresses (let management/insiders own a company and outside investors own queued undilutable soft loans).
  • The total potential market for online job sales has been estimated externally at $3B
  • Facebook, and facebook add-on applications, are a likely future threat

If LNKD's top potential sales are $2B-$3B per year, and it will eventually gain 20%-30% margin on those sales, then that warrants a $6B top valuation.  (about $60/share)

If achieving that sales and margin target is 3-5 years away, and shares will be diluted by 30% in 5 years (thus worth 30% less), and it faces competitive uncertainty over that time and in the future, LNKD should be trading closer to $42/share than $120/share.  To value LNKD at $12B ($120/share) implies future $3B in sales at high margin and market dominance with continued growth expectations.  There's just too much that can go wrong in those expectations.

An update is here


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