Let’s Set Aside Facebook Comparisons and Look at LinkedIn as a Business: Google-ish?
The scars from Facebook (FB) and friends are fresh enough to make many investors leery of LinkedIn (LNKD), the professional profile site whose shares trade at valuations reminiscent of the dot.com bust. But as LinkedIn delivers huge profit gains, more paying customers and new earnings streams quarter after quarter, one can’t help but ask: do we finally have the next Google (GOOG) here?
Plenty seem to think so. Some 12 out of 24 analysts that follow the stock recommend buying LinkedIn despite its unheard of share price ratios. LinkedIn shares trade at a whopping 745 times historic earnings and 15 times sales – a level usually seen only in companies reporting serious earnings drops or those expecting serious breakthroughs. Alexion Pharmaceuticals (ALXN), for example, trades at 107 times earnings because it’s just been approved to sell the only effective treatment for a fatal condition. Apple (AAPL) trades at about four times sales. LinkedIn’s valuations are fantastic in the company of almost any healthy company.
Valuations like that suggest faith in LinkedIn’s ability to grow like Google and replicate those fabulously famous share price gains it gave investors in its early years. What investor doesn’t now wish he’d ignored Google’s high valuations its early days to pick up shares at about $135?
So far, LinkedIn has done everything right to maintain such respect. Its earnings reports beat expectations and consistently show huge revenue gains, including an 89% hike in the last quarter compared to a year earlier. Its underlying earnings are up some 150% since its May 2011 IPO.
Anyone can set up a profile page on LinkedIn for free, but the company makes money by selling admittance to these pages and ads on them. Its biggest assets, however, are the services and information it sells to job recruiters. Unlike competitors, LinkedIn can give recruiters easy, direct access to professionals who are not actively looking for work. Popular new features have helped more than double revenues over the past year in this division, which now accounts for more than half of the company’s overall sales. The business was buoyant even in Europe, where one would expect spending on job recruiting to have tanked.
In fact, every business segment in the company reported 60%-plus growth last quarter. More individuals paid up for subscriptions to make their job searches easier (things like high profile resumes, and introductions to targeted employers), and advertisers forked over more money to get onto LinkedIn pages. LinkedIn’s revenue per page is up about 25% from a year ago.
The kicker is in its profit. Lots of companies grow quickly but eventually disappoint investors because they can’t turn sales into profits. LinkedIn is spending money on growth but still building profits and, more pointedly, profit margin. That alone sets it apart from a few of the famously promising growth companies that haven’t delivered sustained share price gains, like WebMD (WBMD) or Groupon (GRPN).
All of this paints LinkedIn as a fine company. But is it good enough to deliver Google-like gains for investors? Really, it will have to out-Google Google to do so. No one ever paid for Google shares the kind of price investors are paying for LinkedIn; at least not when the shares are considered on a PE ratio.
Very early Google investors did pay slightly higher price/sales valuations than those of LinkedIn now. Fifteen months post IPO (which is where LinkedIn is today), Google was down to a P/S of about 13.
What’s today’s investor to make of all that? There are several reasonable ways to discount the comparison, including the fact that the market generally valued companies slightly higher in 2005 than it does today. The bigger difference may lie in the fundamental value of the product on offer. LinkedIn shares have risen because it’s designed a unique new product that’s in demand. That’s great. Just remember that Google did that so well it became a verb.