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Linked in Case

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Linked in Case
When attempting to determine the valuation of LinkedIn it helps to understand some of the issues involved. The most accurate way to value a stock’s price is using discounted cash flows. The problem with this approach is that it is nearly impossible to predict with any accuracy what the long-term cash flows are for a given company; especially a company that is young or that might be using an innovative and new business model. Additionally, knowing what long-term cash flows look like requires knowledge of the long-term growth rate, operating margin, weighted average cost of capital, discount rate and reinvestment rate. This makes using discounted cash flows especially difficult young companies. The discounted cash flow, in Exhibit #1 below, shows an imputed value of $109 per share versus the current market price of $246 per share. This calculation is based on an industry average weighted average cost of capital of 10% and a discount rate of 4%. However the key point is that the model assumes that revenues will grow from $972M in 2012 to $4,029M in 2018 or 415%. The fact that the market price is higher than $109 per share indicates that investors believe that the potential for revenue growth is even higher than 415%.
Another potential valuation issue relates to LinkedIn’s revenue recognition method. LinkedIn recognizes its Hiring Solutions Revenue from job postings when the posting is displayed or over the contract period, whichever is shorter. This may cause revenues to be overstated in the current year if a contract runs into the next fiscal year. The overstated revenues would be extrapolated and multiplied into the future causing investors to over value the stock. In 2010 Hiring Solutions Revenue accounted for 42% of total revenues.
There are many factors that can cause investors to increase or decrease their valuation of a company. One important characteristic that impacts a company’s valuation is competitive advantage. LinkedIn is believed to have high



References: Brochet, Francois and Weber, James; “LinkedIn Corporation” Harvard Business School, 9-112-006, Rev: January 6, 2012 http://www.wikiwealth.com/discounted-cash-flow-analysis:lnkd http://www.tradingfloor.com/posts/linkedin-valuation-exposes-pe-flaws-1435998927 http://www.businessinsider.com/the-truth-about-linkedin-2011-5#ixzz2drbW0sjM http://seekingalpha.com/article/1184401-afraid-of-linkedins-valuation-you-shouldnt-be http://wallstcheatsheet.com/stocks/is-linkedins-valuation-stretched.html/

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