Now That LinkedIn Is Worth $9B - What Is Facebook Worth?

| About: Microsoft Corporation (MSFT)

Earlier this week, I wrote about LinkedIn’s (LNKD) IPO and expressed some doubts about its valuation as a $4B company. Needless to say, at this point, anyone who bought LinkedIn at its $45 per share IPO price made a killing. In fact, investors more than doubled their money as the stock opened near $83 but quickly reached $100 and beyond before ending the day at $94.25. That sets LinkedIn at a valuation of close to $9 billion. High? That’s an understatement as the company made earnings per share of $0.07 last year. Estimates are for earnings of $0.28 in the next 12 months. That sets LinkedIn at a forward P/E over 400, much more expensive than any other stock on our radar (and apparently more than any other stock in the US too).

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Excessive valuation?

I think it’s fair to say that many consider LinkedIn’s price to be well beyond anything reasonable. The problem in finding a fair price value is mainly that estimates of both revenues and profits differ so much from one person to the next. From what Henry Blodget of Clusterstock said, estimates for 2012 range from:

Revenues: $576-$900M

And for 2013:

Revenues: $750M-$1.5B

In order to establish the facts, let’s start with the more optimistic views, which are certainly possible in my opinion. If EPS could be of $0.75 next year, it’s current price of $94 would imply a P/E for 2012, of over 125. That seems very high. I would certainly consider it possible for LinkedIn to reach those numbers but even if it did, a stock growing at 100% would still hardly justify a forward P/E that high. Could growth accelerate? I think it could and there lies the big problem in shorting a stock like LinkedIn. Not only are buyers not as rational about valuations but it’s very possible that the underlying revenues and profits could jump more than expected as the company becomes a bigger name.

Now back to Facebook

I have not received any emails ot tweets about it but I’m certain that by now, some of you are tired of hearing me talk up Facebook. I’ve said that at a $70B valuation, it was the best deal out there. I’ve also expressed my frustration for being unable to join in on the secondary market action on Facebook. In light of today’s action, I fear that investors will realize a few things, not only about LinkedIn, but about Facebook. If LinkedIn is trading at a $9B valuation, how much is a much bigger, much more important social network worth? Just to recap, Facebook is expected to earn $2 billion in profits this year on revenues of close to $4 billion. The company is growing at a similar pace as LinkedIn. 10 days ago, I had discussed a valuation of $150-200B but in light of yesterday’s jump in LinkedIn, that might be conservative.

If I assume that Facebook will make over $3B next year, and that it trades at a much cheaper P/E of 100, that would set the market cap of $300B! You did read it right. I’m not saying that I would buy Facebook at such a valuation but I’d certainly jump at any opportunity to go Long on Facebook against Short LinkedIn (LNKD) at current valuations. It will not happen of course and there would certainly be some degree of risk in such a trade but it seems like a no-brainer that Facebook is very cheap at current valuations.

Disclosure: No positions on LinkedIn or Facebook

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