Linked in Case Essay Example for Free

Linked in Case EssayWhen attempting to determine the valuation of LinkedIn it helps to understand more or less of the starts involved. The most accu compute way to value a stocks price is using discounted specie flows. The problem with this approach is that it is nearly impossible to predict with any accuracy what the long-term silver flows argon for a given union especially a company that is young or that might be using an innovative and new business theoretical account. Additionally, knowing what long-term silver flows look like requires cognition of the long-term exploitation rate, operating margin, weighted average comprise of capital, discount rate and reinvestment rate. This makes using discounted cash flows especially difficult young companies. The discounted cash flow, in exhibit 1 below, shows an imputed value of $109 per carry on versus the occurrent merchandise price of $246 per share. This calculation is based on an industry average weighted average co st of capital of 10% and a discount rate of 4%. However the key point is that the model assumes that tax tax incomes give grow from $972M in 2012 to $4,029M in 2018 or 415%. The fact that the market price is higher than $109 per share indicates that investors believe that the potential for revenue growth is even higher than 415%. another(prenominal) potential valuation issue relates to LinkedIns revenue recognition method. LinkedIn recognizes its Hiring Solutions Revenue from job postings when the posting is displayed or over the contract period of time, whichever is shorter. This may cause revenues to be overstated in the current year if a contract runs into the next fiscal year.The overstated revenues would be extrapolated and multiplied into the future causing investors to over value the stock. In 2010 Hiring Solutions Revenue accounted for 42% of total revenues. There are legion(predicate) factors that idler cause investors to increase or decrease their valuation of a com pany. One important characteristic that impacts a companys valuation is competitive advantage. LinkedIn is believed to piddle high barriers to entry as it takes time for members to build their network which makes members reluctant to start over with a competing product. This creates a low membership turnover environment for LinkedIn. These two characteristics often cause investors to forecast bold revenue growth rates and thereby assign a higher value to a stock.Another important characteristic that impacts a companys valuation is gross margin. Companies like LinkedIn that realise a high gross margin generate morecash which causes a higher stock valuation using a discounted cash flow analysis. All things being equal, gross margin percentage should grow a direct impact on the price to revenue multiple. As we can see from LinkedIns financial statements its gross margin increased from 75% in 2008 to 87% in 2012. EBITDA as a percentage of revenues has a similar effect on the discoun ted cash flow stock valuation. An increasing EBITDA to revenue ratio over time will cause a larger stock valuation. As we can see from LinkedIns financial statements its EBITDA to revenues ration increased from 8.9% in 2008 to 14% in 2012.The rate of growth in sales units is also an important characteristic considered during valuation. Obviously, the faster you are growing, the larger, and larger future revenues and cash flows will be, which has direct implications for a DCF. High growth also implies that a company has tapped into a in good order new market opportunity, where customer demand is seemingly insatiable. This is especially true when the company being cherished has a very large customer base. A large customer base makes a company less dependent on any one customer for its revenue. The business model of LinkedIn is based on the revenues per user.Therefore the number of active people on this social network is the crucial factor in the company valuation. Still, the number of new members LinkedIn is adding each year is slowing. Membership increased 36 percent in the first quarter from a year earlier, down from 39 percent in prior period and 43 percent in the third quarter. LinkedIn is compensating for the trend by adding mobile and web services to fete users on the site for longer. The disposable income of a companys customers can also impact its valuation. LinkedIn is sometimes described as Facebook for professionals. One important difference between Facebook and LinkedIn relates the disposable income of its members. Generally, professionals are easier to make money off of than consumers, so LinkedIn will presumably be able to make more money per user than Facebook.LinkedIn is still primarily a U.S. company, so it can presumably expand to Europe, Asia, Latin America, and other regions. However, the revenue per member is still much higher for U.S. members than members outside of the U.S. Competitors and market share also impact valuation. LinkedIns gift Solutions group continues to win share from Monster.com. Sales increased90% to $161 million last quarter magical spell sales at Monster fell 10% to $211 million. LinkedIn shows signs of becoming the preferred recruiting tool. Increasingly, users are willing to move over for greater access as indicated by last quarters 79% increase in membership revenue which was $59 million. Also, the global expansion has pushed membership over 200 million users, up from 100 million in March 2011.After discussing the various issues and factors effecting the valuation of LinkedIn there are many a(prenominal) reasons that I would not buy the stock. I believe that the current market price of $246 per share, which reflects speculated growth rate over 500%, is way too optimistic. Even at the $109 price reflect in the Exhibit 1 discounted cash flow the growth rate would have need to be over four hundred% which I feel is still too high. LinkedIn acknowledges they have a short operating history in a new and unproven market, which makes it difficult to evaluate future prospects and may increase the risk that it will not be successful. Linked in also acknowledges that even if it can achieve a four hundred% growth rate that it could still fail in its ability to build the infrastructure to reliably and hard meet this demand.I also do not like the risk of investing in a company like LinkedIn where management holds a controlling interest so that the minority shareholder cannot make up ones mind management. LinkedIn also has no plans to pay dividends so investors have no possibility to get any devolve on investment without selling their stock. Lastly, while LinkedIn is a market leader in professional networking it does have some large competitors including Viadeo, XING, Monster and even Facebook. Some investors worry that if Facebook decided to pursue the professional networking market that it would easily overcome LinkedIn. For these reasons I feel that LinkedIn represents a ver y high risk investment and many current investors are likely to lose money.