By now, we’ve seen countless commentaries on the assumptions you have to make to justify paying $90+ for a share of LinkedIn Corporation (LNKD), including outrageous growth and sudden economies of scale factored into the margins. Instead of this backwards approach, let’s look at how an accurate, optimistic value should be calculated (and what that value is). In the words of CEO Jeff Weiner on IPO day, “It’s all about the fundamentals.”
Revenue. Using only the most recent quarter’s income, we extrapolate annual revenue to $376 million per year.
Growth Rate. According to LinkedIn’s S-1 prospectus, it's expecting its growth rate to decline (from its current 76% level) in the future, which is understandable as a course of normal business maturity, so we assume a 10% drop in growth rate each year resulting in a four-year annualized growth rate of 61.5%.
Additionally, I would expect the most recent quarters to have some degree of inflated numbers because of a near-term push to polish up before the IPO.
Keep in mind that the $78.33 valuation assumes that everything goes right for the next four years (20% free cash flow margin, 61% growth). Any wrinkle in that execution dials the potential valuation back down towards the $30.53 level. And now the question becomes, even if you are optimistic on LinkedIn’s outlook, why would you be a buyer at the $78 level (or above) where there is no fundamental upside?