LinkedIn made $15 million dollars last year, and they just raised $660 million dollars out of the gate in this IPO. And, this IPO values LinkedIn at somewhere close to 6.5 billion dollars.
A valuation of 6.5 billion dollars on $15 million net income. Let that sink in.
expense growth is 46%, 82% yoy.
revenue growth is 52%, 103% yoy.
So, you have a company that is growing revenue faster than expenses, has 100% year over year revenue growth, and has just hit the inflection point to be profitable... and you want to place a market average P/E on it?
PE ratios are for yield businesses that have been around for decades and with nowhere much to go
With LNKD you should be looking at revenue, competition and market penetration (rev is doubling yoy, three sources, 4500 business customers paying avg. $23k a year, 75% of fortune 100, 60% USA - which means they have a lot of growing to do). they are spending everything that comes in on product development, sales and marketing and R&D - it is all growth phase. $400M revenue this year.
To add - LinkedIn isn't really a 'social' company either since its revenue is not based on ads. They are in the recruitment market, where companies are known to pay tens of thousands of dollars for recruitment leads. And in that regard, they still aren't even exploiting their position as much as they could be (which means they have a lot of room to grow both out and up)
If they wanted to impress skeptics they could cut back all sales and marketing and development and just bank the 450M and pay out a dividend, in which case it would be a market cap of ~$4B, and a lot more love in comment threads on the internet :)
FWIW, they had 250M revenue last year. 15M in earnings might indicate they are aggressively investing in growth. So if you're going to look at that critically, investigate where the other $235M is being spent.
Yeah but they sank all their money into tripling the number of employees at the company and investing in R&D. That's exactly what you want to see if you expect large growth.
LinkedIn is clearly focused on long term gains over short term profits.
LinkedIn is not even trying to make net income so it's erroneous to perform much analysis on that number. Yes, it's a lofty number but LinkedIn has been around for quite some time and has very solid and very rapidly growing financials.
"Let's start by defining 'investing.' The definition is simple but often forgotten: Investing is laying out money now to get more money back in the future — more money in real terms, after taking inflation into account." [1]
-Warren Buffett
"Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return — even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with a fine result." [2]
Those are really important and good points...but they're also why the two amigos don't invest in tech
- hard to predict if LinkedIn will be around and in what form in 20 or 30 years
- Munger's statement is true if the company can keep reinvesting capital at that ROE over a long time period. In fact, beyond an inflection point, a company like Microsoft or LinkedIn can become a natural monopoly and increase revenues and profits a lot with relatively little capital - there are actually INCREASING returns to scale. Which is what LNKD investors are apparently betting on.
Tech investing is more about the Next Big Thing, who is the next Microsoft or Google, and less about is there some moat that lets them earn 18% on capital and keep reinvesting the capital over a long period, which is where Buffett is a master.
I thought this might be interesting, John Cassisy at the New Yorker claims:
"One more cautionary note: Don’t take too seriously the headlines you will see about the market valuing LinkedIn at $8-9 billion. Using the oldest I.P.O. trick in the book, the underwriters only issued 7.84 million shares, thereby creating an artificial shortage. Even at $90 each, the value of LinkedIn’s publicly issued stock is just $706 million. The $8-9 billion figure comes from taking the market price and applying it to the rest of the company’s common shares, more than eighty million of them which haven’t been issued yet. It may well be several years before all of these shares are trading on the open market. At that point, we will have a better idea of what LinkedIn is really worth."
Really the only people making any money here are the underwriter and venture capitalists who took this company public - the guys who pumped up and are now dumping these shares. While they're high fiving eachother with a job well done it's setting up the exact same crash that happened last time.
Suppose there is a tech/social web bubble, is there anything anyone would advise for starting your own startups? E.g:
stick with the day job;
bootstrap rather than take money;
postpone and launch in 2 years;
get in fast while the hype is still there?
Any startup survivors from the last one wish they'd done things differently?
It's mainly the investors that lose out from a bubble bursting--one way to look at it is that a bubble is just a good time to get a high valuation from a company's perspective. By calling it a bubble, you're saying you think there's more money out there looking for startups to invest in than startups whose prospects can support that valuation. That's a good time to get OPM (other people's money) and spend it on whatever your dream idea is, if you think you've got a shot at making it work.
There are of course counterarguments:
- Other startups are getting too much money at the same time you are, and probably spending it in irrational ways that may make it harder for you to be profitable, such as overpaying on advertising and hiring. The same argument can support the idea that the best time to start a startup is during a recession, when the big companies aren't investing enough money in growth.
- When the bubble bursts, there will be far more startups looking for money than money looking to be invested, so you're more likely to have to throw in the towel after bursting.
On the balance, I agree with the advice of most experienced entrepreneurs I've heard--err on the side of worrying more about yourself, your idea, and how you'll execute, and less about the economic environment at the time.
LinkedIn listed 7.8M shares. So far today, and we are only half way through the day, there have been 29.5M transactions - which means each LNKD stock has been bought or sold on average 4 times
Latest NPR Planet Money podcast episode was about bubbles, they interviewed a university professor that was running experiments on his students. They had a fake stock market with only one stock on it that would have a random dividend of either $0 or $2, so $1 on average. Students were given money to invest in the stock market. Running this experiment apparently over multiple courses, even in this small market there would be bubbles.
He brought up one such bubble in a lecture in front of the students, explaining to them that their investment made no sense considering the average dividend. He expected this explanation to crush the bubble since now everyone was aware of it. What happened instead was students going "wow, a bubble, I must get in on it!" and the stock just going even higher.
The IPO should have probably been priced a little higher. Closer to $70 or $80, given this type of demand. The people that were in on the IPO got a very nice return this morning, provided the stock price stays this high for a little while. Also, LinkedIn would have raised something closer to $700 million or more, had the IPO been priced more accurately. Does anyone know who the underwriters were?
Sure, and IPO is essentially a sale of an unpriced piece of equity. Nobody knows really how much its worth but as with earlier funding rounds various techniques try to estimate the value going out the door. That value is the combination of "price per share" * "total outstanding shares" so the total value of the company.
The company registers to sell a certain number of shares, this is additive to the total number outstanding, so once you have what will be the new total, and what you think will be the value of the company, you divide value by total and that is your price per share.
Then you go out on a 'road show' where you talk to various other banks and other investors and you say "We think the company is worth between X0$ and X1$ for these reasons and that is a share price of between $Y0 and $Y1, would you be interested in buying shares?" and they may say "Not really." or "Sure we'd love to by n shares at $Y0 and maybe n1 (often less than n) shares if it was at the high end of $Y1"
Now at some point on this road show, if you're good and the company's prospects look great, you have people who have signed up to buy all your shares, even if it comes out at the higher price. That has validated your price point, now if you haven't even talked to half your prospects you might decide to raise the offering price or increase the number of shares, you go back and call the folks who committed before and make sure they are still on board.
Now you have a list of people who are willing to buy your stock, and then when the market opens you sell them that stock at the high end price, and collect your money.
Now those people (and the bank that is the 'market maker') for the stock may be willing to sell the stock for a premium over what they paid for it. Other investors who have read the S-1 but weren't part of the initial roadshow might say "I'd buy this stock even if it was 20% higher than that initial price." and they put in a buy order for it, someone says "Hey a quick 20%! I'm down!" and sells them the stock they bought at the IPO price from LNKD.
The price bounces around and then lands at a point where nobody else is willing to buy it for any more money than it is being offered at. Nominally the 'market' price for that company.
Now if people start buying the stock for any price because they just "want in on the action." as it were, then the price can rise above the price that is supported by the fundamentals of the company, and that is a speculative price rather than a market price. Stocks priced on speculation define a bubble.
So LNKD priced at $45 I think, they had more demand than they could meet, and the price has risen. Are speculators buying it? Hard to know yet but it seems like there is some speculation going on.
When a new issue is offered to the market, after it is priced but before it actually starts trading, all of the buyer and seller interest is consolidated to determine what price point would result in there being an equal amount of buying and selling. And that becomes the opening price.
Main Street investors clamored for the job networking site's stock, which had only been available to the country's biggest mutual funds, pension funds and other major institutional investors in Wednesday's IPO.
This was from a story on Yahoo finance today. Seems Main Street investors weren't welcome yesterday. Their demand for shares today could well be driving the price. I like LinkedIn, but this feels unduly speculative.
[+] [-] blantonl|15 years ago|reply
A valuation of 6.5 billion dollars on $15 million net income. Let that sink in.
[+] [-] portman|15 years ago|reply
No, that's not how it works.
LinkedIn priced their IPO at $45/share, meaning they raised $352.8 million. The share price right now has no impact on how much money they raised.
[+] [-] 3am|15 years ago|reply
Year; Revenue; Costs; Income 2008; 78,773; 84,282; (4,522) 2009; 120,127; 123,482; (3,973) 2010; 243,099; 223,523; 15,385
expense growth is 46%, 82% yoy. revenue growth is 52%, 103% yoy.
So, you have a company that is growing revenue faster than expenses, has 100% year over year revenue growth, and has just hit the inflection point to be profitable... and you want to place a market average P/E on it?
[+] [-] EwanToo|15 years ago|reply
http://cnet.co/kIKoMh
[+] [-] nikcub|15 years ago|reply
With LNKD you should be looking at revenue, competition and market penetration (rev is doubling yoy, three sources, 4500 business customers paying avg. $23k a year, 75% of fortune 100, 60% USA - which means they have a lot of growing to do). they are spending everything that comes in on product development, sales and marketing and R&D - it is all growth phase. $400M revenue this year.
To add - LinkedIn isn't really a 'social' company either since its revenue is not based on ads. They are in the recruitment market, where companies are known to pay tens of thousands of dollars for recruitment leads. And in that regard, they still aren't even exploiting their position as much as they could be (which means they have a lot of room to grow both out and up)
If they wanted to impress skeptics they could cut back all sales and marketing and development and just bank the 450M and pay out a dividend, in which case it would be a market cap of ~$4B, and a lot more love in comment threads on the internet :)
[+] [-] ianl|15 years ago|reply
[+] [-] webwright|15 years ago|reply
[+] [-] dman|15 years ago|reply
[+] [-] Aloisius|15 years ago|reply
LinkedIn is clearly focused on long term gains over short term profits.
[+] [-] pbreit|15 years ago|reply
[+] [-] unknown|15 years ago|reply
[deleted]
[+] [-] joeburke|15 years ago|reply
[+] [-] stevenj|15 years ago|reply
"Let's start by defining 'investing.' The definition is simple but often forgotten: Investing is laying out money now to get more money back in the future — more money in real terms, after taking inflation into account." [1]
-Warren Buffett
"Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return — even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with a fine result." [2]
-Charlie Munger
- - -
[1] http://money.cnn.com/magazines/fortune/fortune_archive/1999/...
[2] http://ycombinator.com/munger.html
[+] [-] RockyMcNuts|15 years ago|reply
- hard to predict if LinkedIn will be around and in what form in 20 or 30 years
- Munger's statement is true if the company can keep reinvesting capital at that ROE over a long time period. In fact, beyond an inflection point, a company like Microsoft or LinkedIn can become a natural monopoly and increase revenues and profits a lot with relatively little capital - there are actually INCREASING returns to scale. Which is what LNKD investors are apparently betting on.
Tech investing is more about the Next Big Thing, who is the next Microsoft or Google, and less about is there some moat that lets them earn 18% on capital and keep reinvesting the capital over a long period, which is where Buffett is a master.
[+] [-] sampsonjs|15 years ago|reply
http://www.newyorker.com/online/blogs/johncassidy/2011/05/li...
[+] [-] dstein|15 years ago|reply
[+] [-] brosephius|15 years ago|reply
[+] [-] Aloisius|15 years ago|reply
[+] [-] dodo53|15 years ago|reply
Any startup survivors from the last one wish they'd done things differently?
[+] [-] blakeweb|15 years ago|reply
There are of course counterarguments: - Other startups are getting too much money at the same time you are, and probably spending it in irrational ways that may make it harder for you to be profitable, such as overpaying on advertising and hiring. The same argument can support the idea that the best time to start a startup is during a recession, when the big companies aren't investing enough money in growth. - When the bubble bursts, there will be far more startups looking for money than money looking to be invested, so you're more likely to have to throw in the towel after bursting.
On the balance, I agree with the advice of most experienced entrepreneurs I've heard--err on the side of worrying more about yourself, your idea, and how you'll execute, and less about the economic environment at the time.
[+] [-] nikcub|15 years ago|reply
edit: wrong multiple
[+] [-] yoseph|15 years ago|reply
It's so disappointing to watch...
But it's not a bubble if we're able to tell it's a bubble, right?
[+] [-] bemmu|15 years ago|reply
He brought up one such bubble in a lecture in front of the students, explaining to them that their investment made no sense considering the average dividend. He expected this explanation to crush the bubble since now everyone was aware of it. What happened instead was students going "wow, a bubble, I must get in on it!" and the stock just going even higher.
[+] [-] mhp|15 years ago|reply
[+] [-] pemulis|15 years ago|reply
[+] [-] gyardley|15 years ago|reply
If the IPO window's open, it's time to try and climb through it! I couldn't be more excited.
[+] [-] MartinCron|15 years ago|reply
[+] [-] 3am|15 years ago|reply
http://www.bloomberg.com/blogs/paul-kedrosky/2011/05/some-li...
[+] [-] alex1|15 years ago|reply
[+] [-] Aloisius|15 years ago|reply
[+] [-] chopsueyar|15 years ago|reply
There will be less Aeron chairs this time.
[+] [-] georgemcbay|15 years ago|reply
[+] [-] gojomo|15 years ago|reply
http://en.wikipedia.org/wiki/Netscape#Early_years
[+] [-] unknown|15 years ago|reply
[deleted]
[+] [-] gojomo|15 years ago|reply
[+] [-] unknown|15 years ago|reply
[deleted]
[+] [-] pbreit|15 years ago|reply
[+] [-] UncleOxidant|15 years ago|reply
[+] [-] dataminer|15 years ago|reply
[+] [-] ChuckMcM|15 years ago|reply
The company registers to sell a certain number of shares, this is additive to the total number outstanding, so once you have what will be the new total, and what you think will be the value of the company, you divide value by total and that is your price per share.
Then you go out on a 'road show' where you talk to various other banks and other investors and you say "We think the company is worth between X0$ and X1$ for these reasons and that is a share price of between $Y0 and $Y1, would you be interested in buying shares?" and they may say "Not really." or "Sure we'd love to by n shares at $Y0 and maybe n1 (often less than n) shares if it was at the high end of $Y1"
Now at some point on this road show, if you're good and the company's prospects look great, you have people who have signed up to buy all your shares, even if it comes out at the higher price. That has validated your price point, now if you haven't even talked to half your prospects you might decide to raise the offering price or increase the number of shares, you go back and call the folks who committed before and make sure they are still on board.
Now you have a list of people who are willing to buy your stock, and then when the market opens you sell them that stock at the high end price, and collect your money.
Now those people (and the bank that is the 'market maker') for the stock may be willing to sell the stock for a premium over what they paid for it. Other investors who have read the S-1 but weren't part of the initial roadshow might say "I'd buy this stock even if it was 20% higher than that initial price." and they put in a buy order for it, someone says "Hey a quick 20%! I'm down!" and sells them the stock they bought at the IPO price from LNKD.
The price bounces around and then lands at a point where nobody else is willing to buy it for any more money than it is being offered at. Nominally the 'market' price for that company.
Now if people start buying the stock for any price because they just "want in on the action." as it were, then the price can rise above the price that is supported by the fundamentals of the company, and that is a speculative price rather than a market price. Stocks priced on speculation define a bubble.
So LNKD priced at $45 I think, they had more demand than they could meet, and the price has risen. Are speculators buying it? Hard to know yet but it seems like there is some speculation going on.
[+] [-] pbreit|15 years ago|reply
[+] [-] brosephius|15 years ago|reply
[+] [-] iamelgringo|15 years ago|reply
Things are going to get very, very interesting.
Next up, Zynga, Twitter, Facebook, Yelp, Pandora...
[+] [-] orijing|15 years ago|reply
[+] [-] johnohara|15 years ago|reply
This was from a story on Yahoo finance today. Seems Main Street investors weren't welcome yesterday. Their demand for shares today could well be driving the price. I like LinkedIn, but this feels unduly speculative.
[+] [-] random42|15 years ago|reply
[+] [-] emilhajric|15 years ago|reply
[+] [-] lurker20|15 years ago|reply
[+] [-] zach|15 years ago|reply
Quora has been able to thrive and create a truly compelling site in a short time, even with LinkedIn Answers having so many numbers in its favor.
Namesake has been getting traction and executing well -- their valuation has definitely just gone up as well.