So, that was quite an opening for Linkedin.. The stock opened in the mid-80s, almost double the offer price. I know that some of you have used the model that I attached to my last post to value Linkedin on your own and that was exactly my point. None of us has a crystal ball that shows us the future and your estimates are as good as mine.
However, since we are on the topic of young growth companies, here is what I see in the base year numbers for Linkedin, as contrasted with Skype:
a. Linkedin is at an earlier stage in the life cycle that Skype. It revenue growth is more explosive (100% growth last year: Revenues grew from $120 million in 2009 to $243 million in 2010) than Skype's revenue growth in 2010 (20%).
b. Linkedin is already profitable. It reported pre-tax operating income of about $20 million in 2010. In contrast, Skype is still losing money.
Now, here's where the subjective component comes into play in the forecasts:
a. Revenue growth: You may disagree with me on this one but I see a smaller potential market for Linkedin than I do for Skype. While at least in theory, Skype could compete for the much larger wireless telecom market, Linkedin has a narrower focus. To provide perspective, Yahoo's total revenues in 2010 were $ 6 billion and I have a tough time seeing Linkedin generate revenues as large, even ten years from now.
My projection: 50% compounded revenue growth for the next 5 years, scaling down to 3.5% in stable growth. Revenues in 2021 will be about $ 5 billion.
b. Operating margins: I see margins falling somewhere in the middle of the range for companies in this space: Google at the top end and Yahoo towards the bottom. Competition in this space is much fiercer and the barriers to entry seem small.
My projection: Pre-tax operating margin of 15% in 2021, rising from the current margin of 8.23%.
c. Survival: The company has little debt ($2 million), enough cash on the balance sheet ($92 million) with more coming in from the IPO.
My projection: I am going to assume that there is a 100% chance that the firm will survive, though I am not sure how successful it will be.
The valuation, with these inputs, yields a value per share of $47 and I think that that number is at the upper end of the spectrum.So, the original offer price of $43 does not sound unreasonable... As for the current price in the mid-80s, I am glad I don't have it in my portfolio. (Update: It gets worse. There are two classes of shares outstanding and if you incorporate both, the value per share that I estimate drops into the twenties.. I have updated the spreadsheet as well..)
As with the Skype valuation, here is my Linkedin spreadsheet. Make your own best estimates.... and good luck...
However, since we are on the topic of young growth companies, here is what I see in the base year numbers for Linkedin, as contrasted with Skype:
a. Linkedin is at an earlier stage in the life cycle that Skype. It revenue growth is more explosive (100% growth last year: Revenues grew from $120 million in 2009 to $243 million in 2010) than Skype's revenue growth in 2010 (20%).
b. Linkedin is already profitable. It reported pre-tax operating income of about $20 million in 2010. In contrast, Skype is still losing money.
Now, here's where the subjective component comes into play in the forecasts:
a. Revenue growth: You may disagree with me on this one but I see a smaller potential market for Linkedin than I do for Skype. While at least in theory, Skype could compete for the much larger wireless telecom market, Linkedin has a narrower focus. To provide perspective, Yahoo's total revenues in 2010 were $ 6 billion and I have a tough time seeing Linkedin generate revenues as large, even ten years from now.
My projection: 50% compounded revenue growth for the next 5 years, scaling down to 3.5% in stable growth. Revenues in 2021 will be about $ 5 billion.
b. Operating margins: I see margins falling somewhere in the middle of the range for companies in this space: Google at the top end and Yahoo towards the bottom. Competition in this space is much fiercer and the barriers to entry seem small.
My projection: Pre-tax operating margin of 15% in 2021, rising from the current margin of 8.23%.
c. Survival: The company has little debt ($2 million), enough cash on the balance sheet ($92 million) with more coming in from the IPO.
My projection: I am going to assume that there is a 100% chance that the firm will survive, though I am not sure how successful it will be.
The valuation, with these inputs, yields a value per share of $47 and I think that that number is at the upper end of the spectrum.
As with the Skype valuation, here is my Linkedin spreadsheet. Make your own best estimates.... and good luck...
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