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LinkedIn's Valuation: See It As An Option

|Includes: Microsoft Corporation (MSFT)

LinkedIn right now is a ~$17-18Bn option to potentially become a $25-35Bn (please insert your favorite value) company that will dominate professional networking, white collar HR/talent acquisition, the newly created B2B@networking (B2B sales, relationship management for customers and partners, knowing your meeting partner…) and the according marketing taking place.

LinkedIn is a pure growth play and they keep growing like crazy! So there is no need to mention classic valuation metrics but you should note that gross margin is in the high eighties. When the time will come and full growth becomes moderate to little growth they will - when being #1 professional network - be able to 'easily' provide ~25% profit margin. Therefore supporting a higher valuation is not out of this world in general.

Now you can of course play the numbers game. You can do DCF art and will arrive at your favorite numbers depending on how you feed the monster. Since Q4 and FY2012 earnings report the favorite number for the "LinkedIn option" is obviously >$16Bn.

I do not know what future revenue assumption that implies (please tell me) but I think it is easy to see that LinkedIn could end up with impressive revenue numbers. Beside HR the newly B2B@networking component will become/or is the new normal. The dominant player in this market will enjoy some nice pricing power because it will be a growing disadvantage to NOT be in. So it looks like there is plenty of growth potential ahead for LinkedIn and we should all acknowledge that there is a real future for this business.

Even while acknowledging that LinkedIn is really disruptive and is here to stay: Haven't we heard this story before? Growth growth and more growth and in many years down the road the company is able to support a valuation that is more than what you pay now!

The real problem is that it is very difficult to deliver very good execution for years to come without any negative disruption for the business and the stock price. And negative disruption includes expectation-disruptions as well. Even if LinkedIn corporation delivers superb future results without major mistake the investment can go wrong: hyper growth stories tend to break somewhere along the road. Whatever the triggering event might be: an even better story told by some competitor, readjusting of the general network fantasy (bubble bust), exiting of some major share holder or "please insert your favorite risk"; any such event that will trigger the switch in perception from growth fantasy towards fundamental valuation before LinkedIn is able to deliver will send the stock down.

Since I don't want to take the risk of being long I will keep watching LNKD and wait for a real crack in the story or major event. Shorting right away is no good idea because LinkedIn is a real business! But when a disruption occurs I will definitely reassess a potential short position. The funny thing is: It is very likely that the downward correction will overshoot and will make LNKD a good fundamental investment at this point in time. If it does not play out like I assume I will simply do nothing, watch LNKD and try to learn something. Good luck.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in LNKD over the next 72 hours.