LinkedIn: The best candy is already gone

When LinkedIn came in with decent Q4 earnings on Friday, I thought investors would pat themselves on the back, look forward to the next report, and let the price stay pretty much at pre-earnings levels.  But the shares rose 18%, which makes no sense to me.  Ladies and gentlemen, when it comes to making money on LinkedIn, I believe the best candy is already gone.

Here is why!
Why is there such a huge appetite for shares in the business-oriented social network?  Apparently it was the company’s guidance for 2012 that made people hungry. See below:

In other words, management believes revenues will rise to up to $175m for Q1, and up to $860m for 2012. Even $850m represents 62 percent y-o-y revenue growth. This was a confirmation of what cautious investors see as a great future for LinkedIn.

Investors then looked at (adjusted) EBITDA. No one seems to be looking at the adjustments, which are huge. EBITDA is not what you get in your pocketbook as an investos - even less so an adjusted EBITDA.

Look at table 1 again. I have presented a derived EBIT which is based on the other guidance management provided. I deduct depreciation of $16m and $75m and stock compensation which rises to $70m in the full year. This results in an EBIT in Q1 of between $-3 to $-4 and between $10 to $20 for the full year! This corresponds to EBIT margins of -2 and +2 percent respectively. On the full year, the EBIT margin is less than half of what LinkedIn achieved in 2011!

Comparison to other tech companies
When I calculate valuation levels on LinkedIn, I get kind of scared. There is no doubt that LinkedIn is here to stay and will disrupt the hiring sector in the years to come – but this might not be enough for me, as a stock investor, to buy LinkedIn at this point.  It looks as if the all the good candy has already been eaten by someone else, and I hate it when that happens
Look at table 2 below where I have lined up a few interesting companies.

Take Apple – consensus expects them to grow 47.6% in 2012 and you only pay P/E 11.5! LinkedIn management expects revenue to rise by 62%, somewhat more than Apple – but the price for this extra growth is a P/E in the level of 800 times! Take a look at Google and Microsoft. Growth is actually OK as the overall global economy is relatively low growth at the moment. P/E is at level 11-16 times.


Room to surprise?
If aim for a more realistic LinkedIn P/E level of maximum (high) 30 times in three years’ time, what does this mean in terms of earnings compared to today? This would translate into about EPS of $3 as there are just about 100m shares.

As pointed out above, management has low guidance for 2012 net income, so the improvement from 16c in 2011 to $3 in 2014 has to be created in 2013/14. This is an earnings improvement of around 20 times and net income would rise from $11.7m to around $295m!

There are some room to manoeuvre on the expense side, but I am not buying the trajectory. Revenues would have to rise considerably to underpin the expectations.

Here's my point of view: If you buy LinkedIn now, you will be buying something that could and might happen in the future.  Even if it does, you will probably not become the beneficiary of it.  Somebody else has already eaten all the good candies in the box.