Morgan Stanley analyst Scott Devitt has a very bullish note on LinkedIn this morning.He’s impressed that LinkedIn has managed to hire a lot of new people while still being efficient. The revenue per employee has managed to be outpace most companies that are in a heavy investment mode.
Here are the key takeaways from Morgan:
After analysing LinkedIn’s sales force efficiency, we believe the company has deftly navigated a period of heavy headcount onboarding with minimal drag on productivity. Our base case margins for C’12/13E exceed our bull case at initiation, and we are raising our long-term EBITDA margins by 300bps.
LinkedIn is rapidly growing its sales force to capture market share, prompting debates about sales force productivity. LinkedIn’s impressive revenue growth has been driven by 150+% Y/Y increases in sales headcount over 6 straight quarters. This level of hiring often leads to decreasing marginal returns on new hires, which can trip up even the highest-quality companies.
We conducted a sales force efficiency analysis, and were encouraged by the results. Despite periods where nearly 50% of sales heads were recent hires, LinkedIn managed to maintain revenue per average sales head at 75-80% of its peak levels. Enterprise onboarding was even stronger, as managed accounts never dipped below 80% of peaks and account signups per head accelerated during this period. We believe this efficiency has been a primary driver of LinkedIn’s margin outperformance in recent quarters, as our base case C’12/13E margins now exceed our bull case at initiation.
Valuation: We reiterate our OW rating on LinkedIn shares and raise our DCF-based price target to $115, which offers investors +18% upside. LinkedIn currently trades at 31x C2013E EBITDA, and we believe a premium multiple is justified given the company’s 1) persistent triple-digit top-line growth, 2) expanding margin profile, and 3) disruptive product offering.