Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 06 August 2012 at 5:11 GMT

LinkedIn: A company doing well, yet mistreating its investors

Strategist & Equity Analyst / Private

In short I really like what is going on in LinkedIn (NASDAQ:LNKD) and its earnings report last week was just solid. The company knows exactly what it is doing, and all the numbers are steady in the right direction. Compared to this Facebook (NASDAQ:FB) where they seem to be just trying out things in a way that leaves me much less confident.

But that said – I do not understand why investors continue to back the company so strongly, as investors are being treated very poorly.  Employee stock compensation is just entering a ridiculous level and this has to stop. The staff is eating all the pie that should be shared with investors.

People looking at LinkedIn should look at GAAP earnings and not the proforma as there are no good arguments for looking at an adjusted number. The last 12m net income (GAAP) has been USD13m and at the same time stock compensation amounts to USD51m! So instead of trading at P/E 910 times it could have traded at 250 times. When are investors going to say stop to this nonsense?

The numbers
Looking at chart 1 you see why I am fairly confident with what is going on in LinkedIn. The steady rise in revenue and, even more important, the increasing share of Hiring Solutions. This is where they can carve out revenue from the subscriber base at a pace above the growth in registered users.

LinkedIn (LNKD) Revenues

The number of corporate solutions customers has risen to 12k, see chart 2, and after five quarters where earnings per solution was stalling, see chart 3, there is now growth again and this has lifted the overall revenues.LinkedIn (LNKD) user reg development

The number of registered LinkedIn users came just short of 175m, which would have been the average quarterly uptake over the last four quarters. I hope they can continue to keep the pace, as this will underpin the revenues.

LinkedIn (LNKD) Hiring Solutions

Looking at ARPU, specifically looking at the Premium Subscriptions, there has been a long period in the beginning where the earnings-per-registered-user declined, see chart 4, but since then the trend has been encouraging and bodes well for income from this segment.

LinkedIn (LNKD) Premium per Reg User

So there are good signs and guidance from the company underscores their own confidence in a continuing trend in the metrics.

The bad part
In chart 5, I have put together a time series on stock compensation on LinkedIn. From a shareholder perspective, this is really appalling reading! In the period up to the IPO May 20th 2012 the level of stock compensation was just shy of USD10m at an 12m rolling basis, see chart 5.

LinkedIn (LNKD) Stock Compensation

But since then the pace of compensation has just changed for the ridiculous! With the guidance and what they have “booked” already, the pace by end of 2012 will be USD90m. Management tends to overshoot the estimate, so we will probably end close to USD100m.

Over the last four quarters the GAAP earnings – i.e. the money actually going to investors – EPS has been USD0.11. Looking at proforma/adjusted/non-GAAP the EPS accumulates to USD0.49. Looking at a share price close to USD trailing GAAP P/E is 910 times and taking the proforma then it is “only” 204 times.

The take
The good part is that LinkedIn knows what it is doing and growth will probably be good for several years to come. That said, paying P/E 910 times is just insane and even looking at proforma 250 times is still on the lofty side. Investors have to insist that the company put a plug in the compensation payments, or they will continue to pay for the party and never really eat the fruits of their investment.

I would not invest in LinkedIn with the current hostile shareholder attitude. Even on proforma numbers it is a bit lofty. But that said, the business model has low volatility and there is a large potential in the years to come in increasing from only 175m users, and in utilising the knowledge about the users to match job and candidates. I understand longterm investors having  confidence in their investment, but for my part I need to see the stock compensation programs go on the backburner.



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