LinkedIn’s IPO priced at $45 a share. It will presumably trade higher when the stock opens.
(Hopefully not too much higher, or the banks will have blown the pricing and robbed the company of money, the way they did with Zipcar).
$45 a share is a valuation of about $4.5 billion. So, assuming a modest pop, LinkedIn will likely be valued at about $5 billion in the aftermarket.
This valuation already has a chorus of pundits howling about how this is yet more confirmation of an obvious tech bubble.
But is it?
The professional investors who scarfed up LinkedIn shares think they know something about the company that the pundits don’t: Namely, that LinkedIn will do much, much better than the pundits think.
So, what are the professional investors who bought the stock expecting from the company to give it such a ginormous valuation?
Well, we asked around, and we got the official numbers. But first, some background:
In case you didn’t know, whenever a company goes public, Wall Street bankers provide estimates of what the company will do. They don’t release these numbers publicly, of course (individuals apparently can’t be trusted with such information), but they release them privately, to institutional investors who might want to buy the stock on the IPO. Then, 25 days after the IPO, the Wall Street analysts publish their first research reports on the company, and they make their estimates official.
Of course, the truth about these and many other Wall Street “estimates” is that they usually aren’t really “estimates” at all. They are low-balled, sandbagged “guidance” provided to analysts by the company, usually secretly. Everyone involved in an IPO–from the company that goes public, to the banks who take the company public, to the investors who buy the stock when the company goes public–wants the company to “beat expectations,” so it’s in everyone’s interest to make the “expectations” as low as possible.
So the company going public gives analysts absurdly low “guidance” and the analysts turn this absurdly low guidance into absurdly low “estimates.” And then the company proceeds to “beat expectations” even if they fall short of their own internal targets.(Public companies play this game, too. Just look at the ridiculous “guidance” and “estimates” for Apple every quarter. Do you think anyone is ever really surprised that Apple “beats expectations”? Of course not. And Apple doesn’t usually beat expectations. Because the published “guidance” and public “estimates” aren’t the real expectations.)
Anyway, so with LinkedIn, as with other IPOs, some “estimates” have been circulating among the professional investor community to help the investors price the deal. The numbers below are an average of estimates from specific firms, but we have agreed not to say which firms.
And here are the LinkedIn estimates:
Revenue: $410 million
EBITDA: $25 million
Free Cash Flow: ($0.5 million)
Revenue: $576 million
EBITDA: $77 million
Free Cash Flow: $12 million
Revenue: $751 million
EBITDA: $149 million
Free Cash Flow: $79 million
Revenue: $932 million
EBITDA: $232 million
Free Cash Flow: $146 million
Now, what can we conclude from these estimates?
Well, first, they’re a joke.
No investor paying $45 a share for LinkedIn thinks that these estimates are really what LinkedIn will do over the next few years. Paying 45-times 2014 estimated earnings (or 25-times 2014 estimated EBITDA) just isn’t something that professional investors need or want to do right now–not with companies like Apple trading at 16-times actual trailing earnings.
So, we can conclude that professional investors think that these estimates are absurdly low and that LinkedIn will do much, much better. And if the professional investors are right, they will get the added benefit of having LinkedIn “beat expectations” every quarter and having analysts “raise estimates” every quarter, even though LinkedIn isn’t actually beating expectations and analysts aren’t actually raising estimates. And the financial media loves to write and talk about companies that “beat expectations,” so this will ensure that LinkedIn is spoken about frequently and favourably in the media, which will help the stock and make investors feel smart and make employees rich and proud, and so forth.
(Again, it’s in everyone’s interest to pretend that these absurdly low numbers are really “estimates.” But they aren’t.)
So, what are the real estimates for LinkedIn–the un-written “whisper numbers” that professional buyers of the stock are using to value the company?
They’ll be different for every investor, because they are actually estimates. But taking the fake estimates, a public comparable, and LinkedIn’s valuation, we can get a sense of them.
THE TRUTH: Professional Investors Think LinkedIn Is The Next Open Table
Two years ago, in 2009, a company called “Open Table” went public. Open Table’s IPO was one of the first Internet IPOs since Google (and, before that, since Netflix, and, before that, since the dotcom crash). And with vivid memories of losing their shirts in the dotcom crash, investors were understandably wary.
But Open Table was a real company, and the stock immediately traded up–mystifying a chorus of pundits who looked at its trailing earnings and dismissed it as obviously overvalued (the same way they’re doing with LinkedIn).And in the past two years, Open Table has soared from its IPO price of $25 to its current price of $89, sceptics be damned.
Why has Open Table made fools out of all the sceptics (one of which was me)?
Because it has blown away the “estimates” it established at the time of the IPO.
When Open Table went public in 2009, analysts estimated that it would earn about $0.25 a share in 2010 and $0.50 a share in 2011. Anyone who knew Wall Street knew that these estimates were absurdly low, but they didn’t realise just how low. They also didn’t realise how much the market would be willing to pay for a consistent growth and earnings machine like Open Table (which, to its credit, has executed wonderfully).
Open Table actually earned about $0.60 per share in 2010, vs. the $0.25 estimate, and it is on track to earn about $1.00 in 2011, versus the $0.50 estimate. And the stock’s multiple of 2011 earnings is a woozifying 89X.
And professional investors think LinkedIn might be the next Open Table.
So how much do professional investors think LinkedIn might really earn?
We’d guess the real LinkedIn estimates look more like this:
Revenue: $550 million (vs. $410mm estimate)
EBITDA: $50 million (vs. $25mm)
EPS: $0.10 (vs. loss of $0.11)
Revenue: $900 million (vs $576 estimate)
EBITDA: $200 million
Revenue: $1.5 billion (vs. $750mm estimate)
EBITDA: $400 million (vs. $150mm)
EPS: $1.50 (vs. $0.60)
Using those estimates, which are still below what LinkedIn would do if it really were the next Open Table, the $5 billion valuation looks more reasonable.
If you assume LinkedIn can earn $1.50 in 2013, a valuation of $50 a share is about 33X earnings. That’s a hefty multiple, but it’s much closer to reasonable.