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LinkedIn Case #3 - Michelle Amico, GAYvid Arturi, Collin Fre
Transcript of LinkedIn Case #3 - Michelle Amico, GAYvid Arturi, Collin Fre
2. How do LinkedIn’s financial statements reflect its pre-IPO performance?
Quick Ratio = 1.63
Debt-to-equity ratio = 3.14
Growth Rate = 84.2%
Return on Assets = 6.459%
- Safe liquidity, ability to pay obligations
- Significantly leveraged
- Large investments → Rapid growth
- Healthy ROA
What set of assumptions underlie the $9 billion market valuation for LinkedIn as of the end of July 7, 2011. What is your assessment of those assumptions? Note that, based on the first seven weeks of trading for LinkedIn’s stock, its estimated beta is 1.5.
- The market capitalization; for a $94 Billion market value, the market capitalization would be $8.9 Billion.
- This would create revenue of almost 40 times the revenue produced in 2010. This market capitalization would also produce an extreme increase in earnings, over 500 times the amount earned in 2010.
- Going into May of 2010, LinkedIn was a private social media application and user interface of over 100 million users. On May 19th, 2011 the company released its initial public offering to begin selling shares on the NYSE.
- The company released an initial stock price of $45.00. Once the IPO was released the stock price rose over $90 throughout the day with a high of over $122, and finally closing at $94.50 with over 30 million shares traded, raising over $350 million for the company.
- Throughout the following months, the stock price fluctuated back and forth, falling as low as $64 per share but recovering by July back to a price of $94 per share.
1. What are the key drivers of LinkedIn’s value? What are the key risks in implementing its strategy?
- LinkedIn has 3 main revenue drivers - Hiring Solutions, Marketing Solutions, Premium subscriptions
- The biggest driver has shifted from premium subscriptions to hiring solutions in recent years
- Very risky business model
5. If you wanted to buy LinkedIn’s stock, would you be willing to pay more than the value, you derived in question 2.
Value and Price
- Typically- Do not want to pay more than determined value
- HOWEVER- the growth of LinkedIn is significant
- In comparison to Xing:
- Xing Financial Comparison (*Adjusted for exchange rate @ 1.3269)
-Quick ratio = CA/CL = 85,681.9/40,117.5 = 2.1358- LinkedIn (1.6327)
-Debt-to-Equity = Total Liab/Stockholders Equity = 45,648/81,178.4 = .5623- LinkedIn (3.14376)
-Earnings Power= EBITDA/Sales = 22,187.1/72,026.8 = 30.8% (2010) - Linked In (19.728%)
= 15,717.1/59,823.3 = 26.3% (2009)
-Growth rate from 2009 to 2010 = 2010-2009/2009
= 30.8% - 26.3% / 26.3% = 17.1%- LinkedIn (61.8%) ***
Discrepancy in D/E and Pricing:
- Xing is significantly less leveraged than LinkedIn
- Young company- investing significantly more
- Xing Closing Stock Price- $48.23, LinkedIn Projected: $45.00
- We value LinkedIn higher, signaling $45.00 is underpriced
- Multiple Pricing Technique:
-Multiple: Price (Xing) / EBITDA (Xing) * 2010 EBITDA LinkedIn = $104.26
- Maximum Value that LinkedIn can be valued at- comparable to Morgan Stanley and J.P. Morgan’s “overweight recommendations” at $88 and $85 respectively
4. What do you think LinkedIn’s intrinsic value is? Be ready to support your conclusions. For example if you use comparables, what companies and metrics do you choose?
- Not able to get accurate calculation from DCF model because the firm does not have cash flows
- Used EV/EBITDA to calculate which came to approximately 64
- Estimated intrinsic value of stock pre-IPO to be $25 due to risk of industry, risk of company, and competitors
6. What other factors (e.g., low float, dual class of shares) may be contributing to LinkedIn’s market valuation?
DUAL CLASS OF SHARES
Company decides to issues two different types of stocks (Stock A and Stock B) in order to segragate voting power
Linked in had a Dual Class of Shares structure that had Stocks A (stocks issued with IPO and had 1 vote) and Stock B (issued to Executives which gave 10 votes/share
The IPO entitled the public to 8.3% of the voting power, which still left 99.1% of voting rights to company insiders. This may decrease the market valuation because stock A is nowhere near as valuable as stock B, which is only permitted to those involved with the company.
Float of a Stock:
After backing out shares held by owners that total more than 5% of all shares, restricted shares and insider holdings, floating is what are we left with
When the IPO was issued, Linkedin offered 7.84 million shares for $45 a share, out of the 94.5 million shares outstanding.
A low float would permit volatile trading, which is not attractive to most investors, and would decrease market valuation.
Low floats make shares harder to buy and the price to buy will also increase.
By: Michelle Amico, David Arturi, Collin French, Cristina Pierleoni & Spencer Ryan
Background & Summary
- LinkedIn founded in 2003 by Reid Hoffman, to be the first PROFESSIONAL social media outlet
- Linkedin Started with only 45,000 members in the early 2000,s and have grown to over 350 million users in 2015
-LinkedIn was one of the first to join the web-based companies to go IPO
- They were seeing exponentially increasing revenues as consumers from all over the world began to use their product
- Everyone realized the potential the company had, but due to the industry many factors had to be considered to determine the true value of LinkedIn’s stock