Here Are The Factors Underlying Our $163 Price Estimate For LinkedIn’s Stock

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LNKD: LinkedIn logo
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LinkedIn

LinkedIn (NASDAQ:LNKD) reported impressive results in the third quarter, with revenue rising by 45% and adjusted EBITDA margin expanding by 300 basis points annually. Its stock price has risen by around 15% since these results were reported. In this article, we assess the key factors underlying our $163 price estimate for LinkedIn’s stock, which represents around 30% discount to the current market price.

In our valuation model, we expect the company’s revenue to surge from around $2.2 billion in 2014 to over $7.0 billion by the end of our forecast period, driven by broad-based growth across all the business segments. The company’s strategies to redesign member profiles, grow the mobile ecosystem and publisher network, expand jobs listings, and foray into newer geographies and user demographics, will spur engagement and monetization on the platform. In addition, we estimate LinkedIn’s adjusted EBITDA margins will rise from 26% in 2014 to 49% in the long-run, as revenue growth should outpace increase in operating expenses. We also forecast a rapid decline in capital expenditure as a percentage of gross profit over the coming years.

We believe LinkedIn’s revenue will have to grow to over $9 billion and the adjusted EBITDA margin will have to expand to over 55% by 2021 to justify the current market price. Hence, we advise investors to think twice before getting into the stock at these levels. Any failure to meet (or surpass) expectations in the coming earnings releases could send the stock stumbling.

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See our complete analysis for LinkedIn

Revenue Is Estimated To Rise By A CAGR Of 20% Over 2014-2021

Year 2014 2015 2016 2017 2018 2019 2020 2021
Revenue (forecast in $ millions) 2,208 2,862 3,520 4,187 4,894 5,625 6,392 7,110

Though we project LinkedIn’s revenue to surge by 44% and 30% in 2014 and 2015 respectively, we expect the growth rate to slow down over the latter years due to higher base and tougher y-o-y comparisons. We expect broad-based growth across all the business segments, namely – Talent Solutions, Marketing Solutions and Premium Subscriptions. New customer additions and price hikes, along with a ramp up in the sales workforce, will contribute to growth in the Talent Solutions segment. And the other segments will benefit from factors such as high demand for sponsored updates, contributions from recently acquired businesses, and the addition of new features on the platform.

LinkedIn is undertaking several strategic steps to enhance its demand such as:  raising the number of job listings on its platform drastically, developing a multi-app portfolio, building a publishing platform, and expanding across demographic groups and geographies. LinkedIn started aggregating job listings this year from other sites, taking the number of job listings on its platform from 1 million at the end of Q2 to over 2 million currently. [1] It also rolled out multiple mobile applications including ‘connected’ and ‘Job Search’ during the year to increase the share of traffic from mobile devices. In addition, it also launched a publishing network and the weekly long-form posts surpassed 40,000 recently. We expect these initiatives to boost member additions and engagement levels, enhancing LinkedIn’s appeal among both recruiters and marketers.

Expansion in geographies (such as China) and in different demographic groups (such as students) will catapult LinkedIn to the next level of growth. We think delivering the right product for this huge audience group could result in large-scale member additions. While we forecast revenue to surpass $7 billion by 2021, in case it grows much faster to $9 billion, then it would lead to a 25% increase in our valuation for the company’s stock.

Profitability Is Expected To Improve

Year 2014 2015 2016 2017 2018 2019 2020 2021
Adjusted EBITDA margin (forecast) 26% 30% 33% 36% 39% 43% 46% 49%

We forecast LinkedIn’s profitability to rise consistently by 300-400 basis points annually during our forecast period. We expect this improvement to be driven by decrease in R&D and SG&A expenses as a percentage of gross profit, as the growth in latter should outpace increase in operating expenses in the future. The operating expenses could grow at a slower pace over the coming years, as the business becomes relatively more mature. We believe LinkedIn will have to expend lesser resources on expansion, data centers, and product development in the coming years. In the event, adjusted EBITDA margin improves more dramatically to over 60% by the end of our forecast period, it would represent more than 20% increase in our price estimate to $200.

Capital Expenditure As A % Of Gross Profit Will Come Down

Year

2014 2015 2016 2017 2018 2019 2020 2021
Capex as % of Gross Profit 21% 19% 17% 15% 14% 13% 12%

11%

We believe capital expenditure will grow in absolute terms over our forecast period, as LinkedIn will have to invest in technology upgrades to keep pace with the growth in user data. However, as the company slows down its expansion phase in the coming years, capex requirement as a percentage of gross profits is expected to diminish during our forecast period.

Our readers can tweak the estimates in our valuation model to see the impact on LinkedIn’s valuation.

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Notes:
  1. LinkedIn’s (LNKD) CEO Jeff Weiner on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, October 30, 2014 []