Seeking Alpha
Profile| Send Message| ()  

LinkedIn (LNKD) has shown tremendous growth in its stock price over the last year. Since our last update on the stock, its price has increased by 9%. The company's revenues have been growing at a CAGR (Cumulated Average Growth Rate) of 67% in the last four years. Even more importantly for investors is the fact that the Hiring division has shown the best growth rate of more than 90%. The rapid growth rate in this particular division shows that LinkedIn is more a Global HR consultant rather than just a social media company. The only concern for investors should be the decrease in growth of deferred revenues. We believe that next quarter's earnings can be a very important catalyst for the stock price. We are bullish on the company's long-term growth prospects, and therefore recommend a long position on LNKD.

Social Media Bubble

In the last few years, there have been a number of technology companies that have received IPO valuations that did not seem all too realistic. Very few have been successful in creating real shareholder value. A very recent example is Netflix (NFLX), which was traded on extremely high multiples, but failed to show the promised growth to its shareholders. The biggest social media company in the world i.e. Facebook (FB) witnessed a settler IPO, debuting at a price of $38. However, in just six months, investors had already lost half their money. LinkedIn is currently trading at very high multiples, so the question needs to be asked about any evidence for sustainable long-term growth.

Company

IPO Date

IPO Price

Current Price

Gain/Loss

PE

PS

LinkedIn

Jan 2011

$45

$121.4

170%

93.41

17.7x

Facebook

May 2012

$38

$21.9

-42%

34x

10.8x

Groupon (GRPN)

Nov 2011

$20

$4.7

-77%

12.7x

1.5x

Pandora (P)

June 2011

$16

$10.2

-36%

127x

5.09

Table: IPO stats and Current Valuations

Facebook has lost approximately half its IPO valuation, and is currently trading at less than half the P/E of LNKD. On the other hand LNKD's stock price has more than doubled in value since its IPO. The stock is currently trading at high price to earnings and sales multiples of 93x and 17.7x, respectively. The question arises as to whether LinkedIn can deliver the kind of growth that the market is pricing it for?

Growth

The table below shows LNKD's revenue breakup over the last two years. Using consensus revenue estimates for 2012 and revenue distribution reported in 2Q2012, we have estimated expected revenues from each of the company's divisions. The biggest increase has been from Hiring Solutions. The revenue from Hiring Solutions is derived primarily from Corporate Sales and Job Products. This shows that LinkedIn is competing with HR solution companies, such as Michael Page and Monster (MWW), rather than social media companies. This should be a very good sign for investors. This is also the reason that whereas most social media stocks are a plummeting LinkedIn continues to show growth.

$(000)

2009

2010

2011

2012 Q1

2012 Q2

2012 E

Hiring Solutions

36,136

101,884

260,884

102,560

121,592

497,000

Marketing Solutions

38,278

79,309

155,849

47,950

63,105

257,000

Premium subscriptions

45,713

61,906

105,456

37,946

43,510

177,700

Total Revenue

120,127

243,099

522,189

188,456

228,207

931,700

We have used this breakup to calculate the estimated revenues using the CAGR. As can be seen from the table below, the highest Cumulated Average Growth Rate belongs to Hiring Solutions. Using this CAGR, the revenue targets can be predicted as follows:

In (000)

CAGR

2013

2014

Hiring Solutions

93%

$ 957,107

$ 1,843,166

Marketing Solutions

61%

$ 413,694

$ 665,925

Premium subscriptions

40%

$ 249,517

$ 350,357

Total Revenue

 

$ 1,620,317

$ 2,859,448

Using the CAGR gives us revenues of $2.8 billion for 2014. Using the industry average P/S (Reuters) of 5x, we can calculate a target price as follows:

  

2013

2014

Price Target

 

$ 76

$ 134

Industry Average P/S

5x

  

Bearish Thesis

LNKD's CAGR is very high because the company has been able to generate phenomenon growth over the last 4 years. LinkedIn also beat analyst estimates last quarter. In fact, it has beaten analyst estimates in the last three quarters. However, it still remains to be seen if the current growth is sustainable. The results for next quarter will be crucial in this regard. This is because revenues reported this quarter were affected by bookings from last quarter; therefore, we will have to wait till next quarter in order to estimate the growth in next few quarters.

$ millions

2Q2011

3Q2011

4Q2011

1Q2012

2Q2012

Deferred revenues

99

114

140

175

192

QoQ growth

 

15%

23%

25%

10%

Deferred revenues can provide a much better analysis of growth in total revenues. The most suspicious thing for investors should be the reduced QoQ growth of 10% (down 15%) in deferred revenues in 2Q2012. Therefore, as we have mentioned, next quarter's results will be very important in determining the company's long-term prospects.

Analyst Opinions

We have assessed the opinions of 21 analysts for LinkedIn. As can be seen in the chart below, only a single analyst has a underperform rating in the current month. Most analysts (12) have a buy or strong buy rating in the current month, followed by hold rating by 8 analysts.

(click to enlarge)

Source: Yahoo Finance

Bullish Thesis

As we have discussed above, LinkedIn is taking away revenues from other job websites, such as Monsters. A significant presence of 175 million users makes it much easier for companies to hire or market their businesses through LinkedIn, as compared to other HR solution providers. The company has already shown a QoQ user growth of 52% (115 million in 2Q2011). The table above shows price targets using our CAGR-based revenue targets. These calculations show that using a sales target of 2014 and the industry average P/S multiple; a price target of $134 can be calculated. We have used industry average P/S of 5x, whereas the company's gross margins of 86% are much higher than the industry average gross margins of 52%. This conservative multiple balances out aggressive revenue estimates.

Source: Why Should You Buy Linkedin?