LinkedIn / Valuation of High-Growth Firms (BAV, Monday, Week 11)

How much is LinkedIn worth? We have no idea.

Revenue streams
Recruiters: access to user data, $ for job postings
Advertisers: targeted ads (favorable member demographics)
Premium membership: additional features

Key factors for success:
-- Leadership in professional networking; network-effects business
-- HR is a huge industry
-- Growth in member base, successful outreach to corporate customers

Risks:
-- International expansion: two entrenched competitors
-- User engagement: low versus Facebook (maybe)
-- Hard to open up data to third parties (advertising is not as easy on professional sites)
-- Existing job boards (Monster.com)

So how do we do a valuation?

Multiples:
-- Some rough comparables, but is OpenTable really a good comp for LinkedIn?
-- Metrics are bad --- EBITDA/FCF are less meaningful for rapidly-growing firms
-- Base year --- huge differences between 2010 and 2011 financials
NOT GOOD.

Fundamentals (Abnormal earnings):
-- Highly sensitive to revenue growth --- how well can we estimate this?
-- Uncertain margins --- revenue streams have different margins, and it's not clear which will be significant in the future
-- Unclear beta --- sensitive to business cycle? mitigated by subscription model?

Takeaway: It is really hard to evaluate early-stage companies. Most of the value lies in expectations, and the firm has clear incentives to hype.

How to spot a bubble/mis-pricing:
-- Ask yourself: Are the expectations embedded in this price realistic?
If LinkedIn has to capture 90% of global HR market, probably yes.
If LinkedIn has to capture 2% of global HR market, maybe no.
-- What will a good comparable be in 10 years? Is this a winner-take-all market?

• Next: Morgan Stanley Risk-Reward Framework / Valuation in Practice (BAV, Tuesday, Week 11)
• Previous: Facebook (CSN, Monday, Week 11)