Shareholders of LinkedIn (LNKD) have been partying like it's 1999. Before the company dropped a guidance bomb on Thursday, its shares were trading at about a zillion times earnings, give or take. It's hard to pin a P/E ratio to a company that has been growing at the pace of LinkedIn. Total diluted per share earnings from Q2 2012 through Q1 2013 were $0.35. At a price of 200, that's a PE of 571.4, at a price of 175, that's a modest PE of just 500.
Here's another way to put things in perspective. At the end of FY 2012, LinkedIn reported 201.9 million members, a 39% increase from the year previous. If the number of users continues growing at that rate, the company will reach one billion users in late 2017. I don't know how many employable professionals will be on Earth in 2017, but I'll bet it's less than one billion.
If you're at all interested at knowing LinkedIn's metrics and financials, it has put together the most impressive [PDF] that I've ever seen. It quickly gives the impression that the company has plenty to be proud of, and little to hide.
Here's a look at the company's annual revenues, including the midline of the company's FY 2013 forecast.
Year on Year Increase
No doubt about it, the golden age has ended. The top line is only expected to grow by a paltry 48.6%.
Here's a look at EBITDA growth, also with the midline of the company's guidance.
Year on Year Increase
You can quickly see what all the fuss was about. When I heard that LinkedIn's profits were only expected to grow about 50% during 2013, I thought to myself, "Only!"
I pity the analyst expected to stand behind a price target based on these figures. Just for fun, I gave it a shot. I assumed that revenue growth will halve each year until it reaches 6% in 2016 then remain stagnant. Then I applied a sensible price to sales ratio of 2 for the low end, and the recent price to sales ratio of 18 for the high end. In 2022 LinkedIn should be in the neighborhood of $52.71 and $474.42, depending on market sentiment. That is, of course, assuming the company doesn't dilute shares any further.
If you think I'm being silly, consider an official analyst estimate range for fiscal 2015 EPS. I'll stand behind my numbers, but I'm not waiting for the phone to ring, or my LinkedIn inbox to fill up with job offers.
Competitive landscape going forward
Currently the only major threat to LinkedIn's success story is a similar professional network more heavily geared towards Europeans, named Viado. It has used venture capital to expand into India, China, and South America. I wouldn't be surprised if a large proportion of its 50 million members also have LinkedIn accounts.
In my opinion, the biggest threat for LinkedIn could easily be Facebook (FB). Last year Facebook took advantage of a tax benefit and shelled out about $1.4 billion on R&D. If it wanted to develop a "professional" network, it definitely has the means.
Mr. Market is off his meds
Competition aside, there's a ceiling for LinkedIn, or any professional network. According to this study, by the end of this year, about 9% of the world will have a college degree. I think its safe to assume that the number of "professionals" seeking to expand their career opportunities via social media outlets doesn't exceed the number of people with degrees. A very optimistic ceiling for any professional network in 2013 is about 630 million users; LinkedIn is already one third of the way there, with a forecasted 2013 EPS of maybe $1.
To be worth $200 per share with a generous P/E of 20, it would need to sign up every human being with a college degree. Then, it would need to increase the amount of revenue it generated from each one several times over. I'm a glass half full kind of guy, but even at the post guidance bomb price of $175, LinkedIn's multiple is still insane.