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The Brode Report  |  May 2011

David Brode profile   Hi, I have a new whitepaper out on "Top 10 Mistakes that Cause Investors to Shoot Down Deals." You may download it here. Also, if you haven't yet visited my blog, please check it out and share your comments.

This month's newsletter is about LinkedIn's valuation. I discuss four different points of view to see if it makes sense.
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LinkedIn Valuation

So by now you know that LinkedIn had its IPO and the stock zoomed, leaving LNKD with a valuation of $10B during first-day trading. Business writers are just as frenzied as the market and I thought Iíd review some of the themes I see out there:
  1. Theme #1: LNKD is worth more than <famous brand>. Thatís just wrong.

    What people say: How can LNKD be worth more than ... companies in this list include: JC Penny, United Airlines, Tiffany & Co., Red Hat, Sirius XM, Chipotle, Royal Caribbean Cruises, Hormel Foods, Electronic Arts, Hyatt Hotels, Expedia, Seagate Technology, Tyson Foods, Hertz Global Holdings.

    My take: I find this objection hilarious. Hey, GM went bankrupt a few quarters ago. Just because you have a venerable brand name doesnít mean that you have a good business model today. Hyatt and Tyson are in very competitive markets. Sirius has never made a profit. I could just as easily make the case that Seagate is overvalued given the ruthlessness of product cycles and profit margins in the storage business. This objection is pure resistance to change.

  2. Theme #2: First-week trading is a fantasy land. Demand is based on market dynamics.

    What people say: Options arenít available until next week, so the market canít get information based on futures contracts. The stock continues to rise on its own momentum. Pushing every investor looking for social-media exposure through a single IPO door produced a remarkable crowding effect. Tiny floats produce outsized effects, as always. An absurd number of investors apparently had market orders for LinkedIn stock. The deal was deliberately underpriced so cronies can profit.

    My take: It sure seems like a casino out there. Lots of people made (and lost) money this week. In that kind of environment, I think the house wins.

  3. Theme #3: Itís 1999!

    What people say: Itís a bubble! Multiples are ridiculous -- 40x Revenue (not earnings) -- P/E of 600x.

    My take: This is stratospheric even by internet standards. Youíd have to have 30x growth in earnings to then match Googleís 20x P/E.

  4. Theme #4: Itís possible they are worth that much.

    What people say: GOOG counterexample. IPO valuation was $27B with a 300x PE. Now valuation is $170B.

    My Take: You have to believe it will have the staying power of an EBay or Amazon. Both of these sites, I note, are extremely transactional in nature. LinkedIn would have to follow a different model. To some extent Google is a model if the advertisers can crack the code of how to reach LinkedIn members. But it seems like new revenue sources are needed to justify the valuation. Google did this with AdWords. Can LinkedIn?
Overall, Iím a skeptic. But hey, it could happen...

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