Wall Street analysts are initiating coverage of LinkedIn this morning.We’ve seen notes from UBS’s Brian Pitz and Brian Fitzgerald, and JP Morgan’s Doug Anmuth.
Anmuth rated the stock “overweight” and gave it an $85 price target.
“We believe LinkedIn is disrupting both the online and offline job recruitment markets, and deeper corporate penetration and increasing member engagement will drive strong results over the next few years,” says Anmuth of the company, which is presently trading at ~$76.
Here are the five big reasons Anmuth is bullish on LinkedIn:
- Mapping the professional graph. LinkedIn is creating a new way for people to manage their professional identity, interact with their professional network, and gain knowledge and insights. Much like Facebook is doing in social, LinkedIn is mapping the professional graph.
- Large, attractive market opportunities. LinkedIn’s model is diversified across subscription-based corporate recruiting, online advertising, and premium subscriptions. As a result the company is well positioned to take share of both the ~$27 billion addressable worldwide market for staffing and talent acquisition and the ~$70 billion global online advertising market.
- Strategic near-term investment, but clear leverage in the model. LinkedIn is investing aggressively this year in building out its field sales force in the U.S. and overseas and in product development, all of which will likely keep EBITDA margins in the single digits. However, LinkedIn ran at 20% margins in 2010, and we believe the company can regain leverage over the next few years driven by both strong top-line growth and moderating opex.
- Strong growth driven by hiring and marketing volume. We project 2010- 2013 CAGRs of 55% for revenue and 64% for EBITDA. Our estimates suggest revenue CAGRs of 76% for Hiring Solutions and 42% for Marketing Solutions, with growth for both driven much more by volume than price. Our 2013 EBITDA margin is 23.1%, and we do not reach the company’s long-term target of 30% even in 2015, though we believe this could be conservative.
- Overweight rating and $85 PT. Our $85 PT is based on our DCF for year-end 2012. We have also run a scenario analysis that details upside and downside cases. We believe our current estimates could still be conservative, and our upside case yields 2013 EBITDA that is 23% higher and a DCF valuation above $100. Our downside case factors in a slower hiring environment but still yields DCF valuation of $60. Additionally, we believe LinkedIn has scarcity value in two ways: it’s one of the few public companies with social media characteristics and less than 10% of LinkedIn’s shares outstanding are floating.
And here’s the UBS bullet points:
- Disruptive business model with accelerating growth We believe LinkedIn could transform the hiring industry through viral growth of its already massive, socially-connected platform. Rapid, accelerating top-line growth (110% Y/Y in 1Q) suggests market validation for the company’s three business lines: Hiring Solutions, Marketing Solutions and Premium Subscriptions.
- Large and growing global user base with powerful network effects LinkedIn enjoys powerful network effects due to the critical mass of its growing 100MM+ user base. In our view, the size and attractive demographics of the users are a primary, fundamental competitive advantage for the company and it represents a significant barrier to entry for the competition. We anticipate the likelihood of better than expected growth in the user base, with corresponding revenue outperformance that could be above Street expectations.
- Positioned at the convergence of several favourable trends We believe LNKD is a convergence play on several positive secular trends, including social media, Software as a Service (SaaS), online advertising and hiring. In our view, the social graph is a core asset, and the SaaS hiring platform enables a superior way for companies and talent to connect on a large, global scale.
- Valuation: Initiating coverage with Buy rating and $90 price target Our $90 PT is based on a 10-year DCF (11% WACC, 6% long-term growth rate). LNKD trades at ~20x our ’13 EBITDA vs. our ’11-’14 EBITDA CAGR of 108%. While we acknowledge the valuation concerns, we believe estimates may be conservative as powerful network effects drive future adoption of the platform.
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