The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
We are initiating coverage of LinkedIn Corporation (NYSE:LNKD) (“LinkedIn”, ticker: LNKD) with a NEUTRAL rating and a 12-month price target of $106. We are assigning a P/E multiple of 75x to our CY:13 EPS estimate of $1.33, plus cash and short-term investments of $6/share, resulting in a value of $106/share. We believe that the multiple is justified due to the company’s significant potential to deliver operating leverage from cost control, its strong revenue growth rate, its large addressable market, and its dominant position in the marketplace.
Unrivalled scale of over 187 million members provides unique opportunities for LinkedIn users. Members will likely find more professional connections and career-related content than they would on a smaller website. Recruiters gain access to an unrivalled community of potential targets, many of whom have much sought-after job experience. Advertisers benefit from increased mind share among the many decision makers in LinkedIn’s community.
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In our view, LinkedIn has only scratched the surface in terms of attracting Corporate Solutions customers, job seekers, and marketers. LinkedIn ended Q3:12 with under 14,000 customers for its high-ASP Corporate Solutions product. Although it has described its domestic sweet spot number as ≈ 20,000 (the number of US companies with 500 or more employees), with up to 100,000 globally, we believe a domestic addressable market of up to 300,000 could exist, albeit at a lower ASP than the company has enjoyed historically. We expect the number of paying job seekers and marketers to increase as well as the success of LinkedIn’s premium solutions becomes more apparent and the website’s reach expands.
LinkedIn is a superb company, with enviable market position in a large and growing market, good management, and the potential to surprise investors for years. It has great discretion over “controllable” costs, and seems determined to grow reach and network while delivering modest profits. We do not expect to see a significant shift in strategy in 2013, and do not believe that LinkedIn will provide investors with a glimpse of its operating leverage potential until 2014 or later.
For the time being, we believe that LinkedIn shares are relatively fully valued. Should the company show that its growth potential will exceed our expectations, we will revisit our rating and price target. Until we see evidence of more rapid growth, we will maintain our initial NEUTRAL rating and $106 price target.
Michael Pachter is an analyst at Wedbush Securities.
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