Is LinkedIn’s Valuation Stretched?

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

LinkedIn’s (NYSE:LNKD) Q1 beat from strong top-line growth and cost control. Total revenue was $325 million, compared with our estimate of $320 million, consensus of $317 million, and guidance of $305-$310 million. Talent Solutions and Premium Subscriptions drove the beat, and more than offset Marketing weakness. Non-GAAP EPS was $0.45, compared with our estimate of $0.41 and consensus of $0.31. The EPS beat was driven by the top-line beat and cost control, due in part to the timing of new hires.

Maintaining our above consensus FY:13 and FY:14 estimates. Management increased FY:13 guidance for revenue to $1.43-$1.46 billion from $1.41-$1.44 billion, and for adjusted EBITDA to $330-$345 million from $315-$330 million. We continue to see more leverage in the model than guidance implies.

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Weaker-than-expected Q2 guidance reflects increased spending that should drive long-term growth but implies near-term margin compression, and this appears to have spooked investors. The revenue guidance range of $342-$347 million is well below current consensus expectations, likely due to weaker-thanexpected Q1 Marketing Solutions revenue that may reflect a combination of the less mature market for mobile advertising and increased usage on mobile platforms. Adjusted EBITDA guidance of $77-$79 million was well below our previous estimate of $96 million, reflecting the timing of hires, as well as spending on building data center infrastructure and expanding facilities.

LinkedIn’s valuation is stretched. Based upon FY:13 figures, LNKD shares tradeat 14x consensus revenue estimates, over 60x adjusted EBITDA guidance, and well over 100x consensus EPS estimates. These metrics suggest that investors believe LinkedIn has the potential to grow to several times its current size; should the company show the slightest signs of slowing growth, the stock is likely to pull back sharply. We note that LinkedIn shares traded down roughly 10 percent in the aftermarket following earnings, likely due to weaker-than-expected Q2 guidance.

Maintaining our NEUTRAL rating, but raising our price target to $195 from $140. Our price target reflects a P/E multiple of ≈ 75x our CY:14 EPS estimate of $2.60. This multiple averages our EPS growth expectations for FY:13 (over 100 percent) and FY:14 (up to 50 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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