{"id":4283,"date":"2011-05-20T08:13:36","date_gmt":"2011-05-20T14:13:36","guid":{"rendered":"http:\/\/www.jasonapollovoss.local\/?p=4283"},"modified":"2018-09-21T02:06:16","modified_gmt":"2018-09-21T06:06:16","slug":"linkedin-is-not-worth-9-billion","status":"publish","type":"post","link":"https:\/\/jasonapollovoss.com\/web\/2011\/05\/20\/linkedin-is-not-worth-9-billion\/","title":{"rendered":"LinkedIn is Not Worth $8.9 billion"},"content":{"rendered":"<p><span style=\"font-size: 16px;\">Normally I am loathe to write about a specific stock.\u00a0 My usual focus is on equity investments for what they really are: partial ownership of a<em> business.<\/em> But LinkedIn (ticker: LNKD) shares soared in their first day of trading yesterday 104.4% (= $94.24 close\u00a0\u00f7 $45 IPO price &#8211; 1) to close at a market cap of $8.9 billion!\u00a0 This, for a company whose profits last year were a scant $15 million.\u00a0 Just from that alone it should be obvious that LinkedIn is not worth $8.9 billion.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">Let&#8217;s work out the math, though, to put everything in perspective.\u00a0 So what is LinkedIn&#8217;s trailing P\/E based on yesterday&#8217;s performance?\u00a0 $8.9 billion price \u00f7 $15 million &#8217;10 earnings = 593.3x.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">I have written at length about <a href=\"https:\/\/jasonapollovoss.com\/web2008\/11\/20\/price-earnings-ratio-primer\/\" target=\"_blank\" rel=\"noopener\">what P\/E ratios really mean<\/a> to convey, as well as <a href=\"http:\/\/www.fa-mag.com\/marketeconomic-commentary\/6671-the-fallacy-of-peg-ratios.html\" target=\"_blank\" rel=\"noopener\">the difficulties of using P\/E ratios<\/a>.\u00a0 But here is a short primer.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">That 593.3x P\/E means that for every $593.30 you spend to buy LinkedIn, they give you $1 back.\u00a0 Let me ask you a question, if those were the odds at Las Vegas, would you be interested in making such a bet?\u00a0 Even in the lottery you do not need to spend $593.30 to win $1 back.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">So that P\/E is enormous and why would you be willing to pay this kind of money for LinkedIn, assuming that you were a real investor and not a momentum-type speculator?<\/span><\/p>\n<p><span style=\"font-size: 16px;\">The usual answer is that, yes, LinkedIn only earned $1 last year, but that earnings are growing so rapidly that eventually you will make back a ton of money on your purchase of LinkedIn.\u00a0 But the math behind P\/E ratios is just that, math.\u00a0 Meaning that we can figure out just what we are up against if we want to make money in LinkedIn.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">For the following I am relying upon some fairly sophisticated math, but here are my assumptions:<\/span><\/p>\n<ul>\n<li><span style=\"font-size: 16px;\">LinkedIn P\/E at the beginning: 593.3x<\/span><\/li>\n<li><span style=\"font-size: 16px;\">Investment time horizon: 5 years<\/span><\/li>\n<li><span style=\"font-size: 16px;\">Desired compound annual growth rate for that 5 years: 20%<\/span><\/li>\n<li><span style=\"font-size: 16px;\">That reinvested earnings grow just as fast as earnings you are paid by LinkedIn<\/span><\/li>\n<\/ul>\n<p><span style=\"font-size: 16px;\">So how fast do earnings have to grow each year for five years, on average, for you to make that 20.0% return?\u00a0 A whopping 416.6%!\u00a0 In other words, LinkedIn&#8217;s earnings have to be $18.8 billion at the end of year 5, or 1,255.05 x bigger than they are today.\u00a0 That&#8217;s like someone who makes $50,000 per year working right now, making $62.8 million per year in five years!\u00a0 C&#8217;mon!<\/span><\/p>\n<p><span style=\"font-size: 16px;\">Let&#8217;s look at this in an entirely different manner.\u00a0 Yesterday, LinkedIn&#8217;s first day of trading, 30,151,000 shares were traded (i.e. the volume).\u00a0 The trading range yesterday for LinkedIn was $80 to $122.70, let&#8217;s take the median price, which would be: $101.35.\u00a0 So those 30,151,000 shares represented $3,055,803,850, or $3.06 billion.\u00a0 In turn, that means that 34% of the company changed hands yesterday = $3.06 billion \u00f7 $8.90 billion.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">While this may not sound like a lot, imagine if, in your neighborhood 34% of the houses were bought and sold just yesterday!\u00a0 My point is that this is strong evidence of speculation and not investment.\u00a0 You may say, who cares?\u00a0 Why do you care?<\/span><\/p>\n<p><span style=\"font-size: 16px;\">I care, because to make money in LinkedIn you are relying on a game of musical chairs &#8211; that is, you don&#8217;t want to be the last one standing.\u00a0 Let&#8217;s return back to yesterday&#8217;s peak price of $122.70.\u00a0 If you were the one that bought at $122.70, hoping that you could find a greater fool to buy it at $122.71, and you held your shares just until the close of trading yesterday, you would have lost a whopping 23.2% in just several hours.\u00a0 That is an enormous capital loss.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">Or looked at another way, imagine that you bought at yesterday&#8217;s median share price of $101.35, you still would have lost 7.0%!<\/span><\/p>\n<p><span style=\"font-size: 16px;\">By now it should be obvious that I think that LinkedIn is overvalued.\u00a0 Buyer beware!<\/span><\/p>\n<p><span style=\"font-size: 16px;\">Jason<\/span><\/p>\n<p><span style=\"font-size: 16px;\">P.S. &#8211; Don&#8217;t even get me started when Facebook becomes a\u00a0 publicly traded firm!<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Normally I am loathe to write about a specific stock.\u00a0 My usual focus is on equity investments for what they really are: partial ownership of a business. But LinkedIn (ticker: LNKD) shares soared in their first day of trading yesterday 104.4% (= $94.24 close\u00a0\u00f7 $45 IPO price &#8211; 1) to close at a market cap [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[3],"tags":[],"class_list":["post-4283","post","type-post","status-publish","format-standard","hentry","category-the-blog"],"_links":{"self":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/4283","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/comments?post=4283"}],"version-history":[{"count":0,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/4283\/revisions"}],"wp:attachment":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media?parent=4283"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/categories?post=4283"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/tags?post=4283"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}