LinkedIn Overpriced In Spite Of China Prospects

LinkedIn Overpriced Despite China Prospects

LinkedIn (NYSE:LNKD) has entered a very exciting phase with its entry into China via a local language site, a move that will give it access to a huge opportunity. However, even after factoring in the best outcome from China, we still think that the LinkedIn stock is overpriced (see our Linkedin stock analysis). We look at the company’s growth, profitability and current valuations.

LinkedIn Revenue Growth

LinkedIn’s annual revenue growth rate has slowed significantly over the last 3 years to reach 56% in FY 2013 from over 100% in FY 2011. That said, 56% is still a very healthy growth rate to have; however, the company’s future guidance which is lower than analysts’ expectations, pegs growth at 32% - 34% in FY 2014. While a slowdown in the growth rate is expected at these levels, the guidance implies a slight decrease in the absolute revenue growth in the current fiscal compared to last year.

Typically LinkedIn’s guidance has always been lower than analysts’ expectations, but it has consistently beaten their estimates. It would not be prudent to proceed with the assumption that the same would always be repeated. Further, it is important to note that LinkedIn is not expecting any material contribution from its newly set up operations in China in FY 2014.

Key Financials 2011 2012 2013 2014*
Revenue (in millions USD) 522.1 972.3 1,519.3 2,020 - 2,050
YoY Growth (in %) 115 86 56 32 - 34
Operating Margins (in %) 5 6 3
Net Margins 2 2 2

* LinkedIn FY 2014 guidance

LinkedIn Profitability

With LinkedIn’s operating and net profit margins languishing in the lower single digits, it’s not one of its strengths. With its big plans for China, it is very likely that heavy spends in the region will further squeeze profit margins.

Member Base

LinkedIn’s member base has been growing, but this number is prone to overstatement since not all of them would be active. Data from QuantCast suggests that active users as a percentage of total members has been falling from as high as 80% in the past to about 50% in Q4 2013. This is not alarming since it is bound to happen as the member base expands. That said, it is important to note the same as an investor.

LinkedIn Member and active users trend

LinkedIn China

If LinkedIn’s plans in China play out, the country could add a huge number of users to LinkedIn’s member base and eventually account for 25% of its members by 2017. However, monetization rates for LinkedIn in the Asia Pacific (APAC) region are about half of the global average.

According to our estimates, by 2017, Linkedin China could account for about 3% of the company's overall revenue. And so, China’s member base making a significant contribution to the overall revenue is something that might happen eventually once the market matures and starts to see higher monetization rates. But it might not have a significant impact on revenues in the next couple of years. Further, given the track record that LinkedIn’s peers have had in China, one would do well not to take aspirations for granted.

LinkedIn Valuation

Facebook is growing at a faster rate than LinkedIn and the company also has higher profit margins. In our view, even Facebook is overvalued. However, if one were to value LinkedIn by using Facebook’s adjusted Price Earnings ratio (or PE ratio), LinkedIn should be priced at $127 a share.

LinkedIn Twitter Facebook
Adjusted LTM PE ratio 119.1 NA 79.0
LTM price to sales ratio 15.1 46.1 22.2
EV/EBITDA 59.5 NA 34.1

Even using Faceboook’s Enterprise Value/Earnings before Interest, Tax, Depreciation and Amortization (EV/EBITDA), one would arrive at a price of $113/share.

LinkedIn’s stock price has fallen by close to 11% since the beginning of 2014, but we think that it might have a long way to go before it becomes attractive.

To see LinkedIn’s latest stock price movement, click here (NYSE:LNKD)

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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