Linkedin Case Study

Problem Statement:

I (Nick Marino) have recently been appointed as a stock analysis for major investing company. My boss has asked me if they should have there clients invest in LinkedIn by determining the valuation of LinkedIn .

Analysis

Currently the growth of the company is significant they have doubled growth in 2009 and 2010. If you annualize Q1 2011 they will grow over another 110% in revenue. Though they turned the corner with meaningful net income and EBITDA in 2010 its obvious during 2011 first quarter results that they are pouring significant dollar into sales, marketing expenses, and product development. Product development annualized in Q1 is almost 100 compared to 65 million in 2010, similarly sales and marketing are on a track to almost double from 2010 of 59 million to the first quarter annualized to 117 million. One of the concerns will be if these significant costs will drive revenues enough to deliver profits and EBIDTA.

Net income for March 31, 2011 was only 2 million or annualized amount of 8.3 million compared to 15.4 million for the year-end in 2010. Registered member have increased 64% from 2009 to 2010 adding 35 million members. LinkedIn also saw significant growth in Q1 2011 although it does not appear growth rate will keep with prior years, though in sheer numbers it looks like it will increase. As a software company they have spent a decent amount of purchasing property and equipment and they are going to have to decide if those hard costs are going to continue as they grow.

The company has little debt and has almost 93 million in cash. Financially the company is doing well the question that needs to be asked is if the company can continue to do well in the future years.

The assumptions of Morgan Stanley and JP Morgan, who are supporting a stock price in the mid $80’s, are that LinkedIn has: In the case of JP Morgan a 5 year 55% CAGR from 2010-2013, with the margins increasing from 18% to 23.1%, and the cost of capital at 10.5%, and a terminal growth rate of 6%. In the case of Morgan Stanley they are showing a 10 year CAGR of 26%, with margin increase from 18% to 35%, and the cost of capital 11.5% and terminal growth rate of 6%.

The cost of capital assumptions of 10.5% and 11.5% seem to be a reasonable cost associated with the market value of LinkedIn’s equity. Though given the risks the higher 11.5% makes more sense. The risks included would be growth rate, competition, and purchasing of new assets. The other risks would be that they are a software company and with technology constantly changing it is hard to predict anything in this industry. Morgan Stanly and JP Morgan both assume a terminal growth rate of 6%, usually the absolute upper limit is the long run growth rate of the company 2-3%, plus expected inflation given historical inflation.