Just How Expensive Is LinkedIn?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I've seen several articles on Motley Fool touting the promise that is LinkedIn (NYSE: LNKD). The one that caught my eye was Brian Stoffel's article, “I'm Buying This Hated Stock”. Specifically, the part I couldn't quite read past was this comment: “Yes the company currently trades at 824 times earnings, but a wise man once offered safe advice about sky-high P/E's: They're the result of either a company just starting to be profitable or a company that the market rightly respects for its execution and potential.” I've read Brian's writings for a while. However, as he justified paying over 800 times earnings, I thought he might have gone off his rocker. I don't take anything at face value. So with that in mind, let's find out just how expensive LinkedIn is, or isn't.
Current Price: $86.44
P/E on '12 earnings: 141.70
P/E on '13 earnings: 80.04
Growth expected: 89.77%
PEG for '12: 1.58
So you're probably going to call me crazy too, but I'm going to show you in a minute how I think Brian could be right. There might even be a way to call LinkedIn cheap. There I've said it, there is a way to look at LinkedIn as undervalued. LinkedIn is expected to grow earnings by almost 90% over the next 5 years. This is the average of 16 analysts, people who get paid to watch and evaluate this company. Oh, and those analysts that think LinkedIn is going to grow at 90%, they have been made to look foolish (small f) in the last 3 quarters. In fact, in the last 3 quarters, LinkedIn has beaten estimates all 3 quarters by a mile. The company's average beat comes in at 251.57%! Let me put it this way, even if LinkedIn just beat estimates by the smallest margin they have (71.40%), analyst estimates for 2012 could be off by as much as $0.43 per share! In plain english, the company could earn $1.04 this year! Consider for a minute that 90 days ago the average estimate for 2012 was $0.25. Three months later we are already at $0.61. If LinkedIn keeps beating estimates, this stock might have a 83 P/E by the end of this year. That is a huge deal, because with 90% expected growth you would get a PEG ratio less than 1. A PEG of less than 1 is something most people use to express that a stock is cheap, or trading at a discount to its growth rate.
There are a few other factors that lead me to believe LinkedIn could be headed in the right direction. First, their gross margin has been improving. In the last 3 quarters, they've improved gross margin from 82.14% to 84.16%. Second, their free cash flow percentage, in the last 3 quarters, has improved from 64.22% to 67.36%. The company is improving both its gross margin and the amount of free cash flow it keeps from earnings.
When it comes to competition, LinkedIn's main competitor is Monster Worldwide (NYSE: MWW). Monster is a household name, but is reportedly “exploring its options”. Monster sells for $8.32 and has a forward P/E of 32. Monster is expected to grow at about 12%. I can make the argument that Monster is relatively more expensive than LinkedIn. Since Monster sells for 32 times earnings, and has a 12% growth rate, the company's PEG ratio is 2.6, versus LinkedIn's PEG is 1.58. In addition, while Monster generated about $0.04 per $1 of assets in free cash flow, LinkedIn generated over four times that much. If a company like Monster commands a P/E of 32 with one-fourth the cash flow, then its reasonable to believe that LinkedIn should command a premium. Since LinkedIn actually sells for a relative discount, this is another reason to believe that the company could be a good investment.
So the good news is I can report that Brian Stoffel is apparently not crazy (at least not in this case). I can also say that Brian seems to be onto something here. While the current P/E ratio is scary high, the company has been crushing analyst estimates. If LinkedIn continues to beat estimates, the company could actually sell for a discount to its growth rate by the end of 2012. Not only will I be putting LinkedIn on my watch list, but after this I'm going to have to consider a real money position in the company. Use this post as a starting point for your own research, and see if you should be LinkedIn to this company.
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