The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
LinkedIn Corp. (NYSE:LNKD) will report third-quarter 2013 (ending September) results on Tuesday after market close, with a call at 2 p.m. PDT (dial-in: 914-495-8529, conf. ID: 74554060, investors.linkedin.com).
We expect third-quarter results in line with our estimates. We expect revenue of $383 million versus consensus of $385 million and guidance of $367 million to $373 million. We expect adjusted EBITDA of $93 million versus guidance of $81 million to $83 million and earnings per share of 43 cents versus consensus of 32 cents driven by R&D and SG&A operating leverage. LinkedIn historically beats its guidance.
LinkedIn priced a follow-on equity offering during the quarter of 5.4 million Class A shares at $223 per share for a total offering amount of roughly $1.2 billion. The size of the offering makes us believe that a potential acquisition is likely, as LinkedIn does not have any debt and its pro forma cash balance is much higher than what we believe is required for working capital purposes. We note that LinkedIn lookalike Xing (a public company) operates in Europe and has managed to maintain significant market share there in spite of LinkedIn’s growth.
LinkedIn made progress in its efforts to grow its international membership during the quarter, crossing several milestones in emerging markets. LinkedIn passed 15 million Brazilian members in October, up 50 percent year over year and up 15x from when the company launched its Portuguese site in 2010. In September, LinkedIn passed the 1 million mark in Saudi Arabia.
LinkedIn’s valuation remains stretched, in our view. LinkedIn shares trade at roughly 18x FY:13 consensus revenue estimates, over 75x FY:13 adjusted EBITDA guidance, and over 150x FY:13 consensus EPS estimates. Investors appear to believe that LinkedIn has the potential to grow to several times its current size; while we view this as possible, should the company show the slightest signs of slowing growth, the stock is likely to pull back sharply. We think the market potential for LinkedIn is huge, but question whether the subscription model is the right one to maximize potential revenue.
Maintaining our NEUTRAL rating and price target of $195. Our price target reflects a P/E multiple of about 80x our CY:14 EPS estimate of $2.47. This multiple averages our EPS growth expectations for FY:13 (almost 100 percent) and FY:14 (over 40 percent). Although our multiple is steep, we believe it is justified due to significant potential to deliver operating leverage from cost control, strong revenue growth, a large addressable market, and dominant market position.
Michael Pachter is an analyst at Wedbush Securities.
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