Yesterday, LinkedIn (LNKD), the online professional networking service, priced a secondary offering of 8.8 million shares at $71 per share after reporting its first quarterly loss since its IPO back in May 2011.
So let’s review some numbers here because I am having a tough time with this one.
As of September 30, the company’s last 12-months (LTM) Revenues were $435MM and LTM Net Income of just over $10MM. With add-backs from depreciation and amortization the company generated Earnings-before-interest-taxes-depreciation-amortization (EBITDA) of about $25MM.
LinkedIn’s May IPO raised $352.8 million for the company ($248 million in net proceeds) and and as of September 30, the company still has $387MM in cash and short-term investments on its balance sheet and no real debt.
LinkedIn offers three major products
- Hiring Solutions: Revenue derived primarily from the sale of LinkedIn Corporate Solutions and LinkedIn Jobs products, selling LinkedIn Jobs on their website to enterprises and professional organizations.
- Marketing Solutions: Revenue derived primarily from fees received from marketers, principally advertising agencies, direct advertisers and user created ads that are displayed on their website.
- Premium Subscriptions: Revenue derived primarily from online sales of our Business, Business Plus and Executive subscription products. These are monthly or annual subscriptions.
But here is where I really begin to have trouble with the story:
Just like the good old days of the late 1990′s, LinkedIn is spending a lot of time measuring its success based on user growth. Metrics such as “Number of registered members”, which stands at 131.2 million as of September 30, 2011 vs. 90.4 million as of December 30, 2010, a 45% increase. Yes, it is true that this increase in user base has led to a jump in top-line revenue, yet profitability has decreased due to material increases in R&D expenses of 38% and comparable increases in SG&A and compensation.
The company’s estimated forward P/E (FYE 2012) ratio is an unreal 246.7x. To put that into perspective Google’s estimated forward PE is 13.9x and Apple’s is 9.9x and both Google and Apple are already highly profitable companies.
I have to ask myself, “Do I believe that LinkedIn is going to be as successful and offer a ‘change the world’ type product that will warrant such as massive PE ratio?”
Also, this new equity issuance is going to raise another ~$550MM or so after in fees bringing LinkedIn’s liquidity position to about $900MM. What are they going to do with the money?
As I read LinkedIn’s latest 10-Q it appears to me that the company will spend the money on research and development, improving technology and infrastructure to support a growing user base, acquiring talent (employees) and acquisitions.
This is a very tough story to me and I am not buying. With a sizable expense base (they have over 1,300 employees!) and a huge PE ratio, to me this stock is already completely over-valued. I can’t understand how the stock goes up from here without a transformational product offering and/or event.
What do you think? Are you buying this?