"There are things known and there are things unknown, and in between are the doors of perception." -Huxley
"Change the way you look at things and the things you look at change"-Dyer
The following is a short exchange that took place two days ago between me and a good friend who invests in the tech space.
Tech Investor Buddy: I'm long LinkedIn (LNKD) been doing very well. You should take a look at it as I think it still has plenty of upside
Me: Yea, I really don't have a strong opinion on that stock.
Tech Investor Buddy: But you were willing to go long Facebook (FB) in June at 27 why wouldn't you be willing to go long LinkedIn?
Me: Yea, well that was a sentiment trade and I was gone after a few weeks, and in retrospect I consider myself lucky. As for LinkedIn it is a lot more expensive than Facebook and simply defying gravity at this point. Can't see why you'd be comfortable long the stock.
TIB: True, the multiple is high, but it is justified. Facebook doesn't have a real revenue model like LinkedIn does.
This is the point where the conversation gets interesting.
Me: Whoah, Facebook doesn't have a REAL revenue model? What are you talking about?
TIB: Well, yeah, they sell ads but that isn't sustainable. LinkedIn has recurring subscription revenue; it is a real business.
Me: Really? Do you know where Facebook's EBITDA margins are at in comparison to LinkedIn?
TIB: Umm, I'm not so sure I don't really comb through the numbers like you, but I think they are probably about the same right now cause LinkedIn has still not reached its full potential. Maybe slightly better…..I don't know.
Me: Yea, that's what I thought you'd say. Actually as of last quarter Facebook's adjusted EBITDA margins are about triple LinkedIn's margins. And this is on a revenue base that is going to come in at 5x-6x LinkedIn in 2012. Yet, lately Facebook has traded at roughly 4x the enterprise value of LinkedIn.
TIB: Yea, well that's because Facebook is on the decline and LinkedIn is only starting to grow. The market is just pricing that in, you of all people should get that.
Me: Lol, you are sounding like a hedge fund manager now. Frankly I don't know why LinkedIn continues to trade where it is at, but my guess is it is because most people have the same ill conceived notions you have about them in comparison to Facebook. LinkedIn would kill for Facebook's 'not real' revenue model. Same goes for Twitter which a lot of tech investors now seem to think is better off than Facebook. An amusing argument if you ask me, but one that nonetheless has caught some traction in this post Facebook IPO world. Reality is you just sat down and told me to buy a stock that is trading at an enterprise value multiple of 70x its 2012 forecast adjusted EBITDA over one that is trading at closer to 17x, and in doing so had no idea whose running the wildly more 'profitable' business model.
My friend didn't really have much to say after that, but this exchange really got me thinking about shorting LinkedIn. If investor perception is reality in the market, and that perception is just flat out wrong, then the reality is grossly distorted, and a major opportunity should exist exploiting that. Now, I'll be honest, I like the LinkedIn business model but based on the heat Facebook is getting I am a bit perplexed by the stock price. Why didn't LinkedIn make the cover of Barron's? I mean at Barron's $15 issue selling, headline grabbing target, Facebook is a $30 billion enterprise value company. That would make it just 2.3x LinkedIn's valuation yet with 3x the margins, 5.5x the revenue, 15x the adjusted EBITDA, and over 5x the users. Makes you wonder why nobody is putting LinkedIn on the cover of Barron's with a $20 price target.
Now I know the standard reply here will be look at the revenue growth rates. Yes, LinkedIn's year over year revenue growth rate as of last quarter was double Facebook's, and Facebook is slowing down pretty fast. But take a closer look at LinkedIn and you might conclude that they are no more than 6 months away from that very same problem. In the last quarter deferred revenue, which is what you should be tracking considering this is largely a subscription driven revenue model, was up just under 10% sequentially. (FYI- Facebook which is not running a subscription model grew total revenue 11.9% over the same period.) Not bad on an absolute level, but a definite cause for concern if you are looking at this on a relative basis. Since LinkedIn went public deferred revenue has grown at 21%, 15%, 23%, and 24% respectively. That works out to an average of 21% sequential deferred revenue growth since the IPO. So, last quarters slightly sub 10% number should get your attention. If LinkedIn's bookings rate doesn't re-accelerate there will be no hiding the slowdown this implies in the revenue growth rate over the coming quarters. At which point maybe LinkedIn makes the cover of Barron's and becomes a CNBC hot button stock or an Einhorn rumored short.