Monday, 23 May 2011 10:59

A Realistic Forensic Valuation of LinkedIn - There Ain't No Surprises Here...

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Technology Bubbliciousness Is Back With A Vengeance!

LinkedIn (LNKD) went public with an absolutely unrealistic valuation that illustrates the dangers of ZIRP policy that has carried on for too long. The marketing machinations of investment banks combined with a total lack of respect for risk and the cost of capital has allowed such to happen – and we all know how this is going to end!

In 2010 LinkedIn generated $15m of PAT (profit after taxes) as quoted by the popular financial media. But that’s PAT. What the media and pop media readers are forgetting is what’s available to common share holders, you know the guys holding that stuff trading on the exchanges. LinkedIn has total redeemable convertible preferred stock of 10.8m (4m Series C and 6.8m series D, Convertible preferred stock of 38m (17.2m series A and 17.5m Series B). After accounting $11m for undistributed earnings allocated to preferred stockholders the PAT attributable to common share holders was $3.4m. For those perpetual pessimists who are not well versed in calculating 5 digit PEs… The math already denotes LinkedIn trading at a PE of… well... I’m actually damn near embarrassed to print this… 29,000x.

LinkedIn was expensive going into the IPO. Coming out on the other side it simply got ridiculous.

Relevant operating metrics are trending up, but as you may have guessed… They are trending at a diminished pace. Growth is slowing, not quickening – which is what you will need to justify anything near this atmospheric price.

Subscribers can download valuation scenarios ran for LinkedIn using the most optimistic parameters even remotely possible - File Icon LinkedIn IPO valuation & comments. Included are the IPO details. We have factored in triple digit annual growth for the next few years with a cap on expenses; used a 500% social networking premium for relative valuation (although Monster Worldwide has a social component for a whole lot less), and the resultant valuations still came out showing a bubbled price simply dying to be burst. Professional and institutional subscribers may access the full model via online spreadsheet here.