LinkedIn IPO Brokers Begin Circle Jerk…….Making Apple Worth $3,500 a Share

This is obscene. A lot of people are going to get burned buying shares on these recommendations on a company that has admitted it will not make money anytime soon……..if ever. For those interested, here is the first post I wrote on the subject

The news:

It should be noted here that the firms upgrading here today all had a hand in the IPO. So, their “buy” recommendations ought to be treated, um, skeptically? Remember, the price has fallen from a day one high of $122 to the $70’s. The banks are thinking “we need to protect the interest of those insiders locked into shares here folks. We can’t have our clients paper fortune evaporate before they can dump this steaming pile of shit on other investors”. Or something like that…….it might not be an exact quote.

BofA/Merrill ($BAC) sees potential member and revenue acceleration for LinkedIn ($LNKD) following last month’s IPO and starts coverage at buy ($92). Firm cites strong 2Q results, traction in international markets and new products that can drive improving user engagement as potential upside drivers, and sees a “$10BN revenue opportunity” for LNKD’s current recruiting tools with more likely to follow. Other positive growth trends include increasing consumer use of social networking, migration of job postings from offline to online, and greater advertiser acceptance of social media ad formats, firm says. UBS ($UBS) also starts coverage at buy ($90), JPMorgan ($JPM) starts at overweight ($85).

“As the largest professional social network in the world with over 100 million registered members, LinkedIn is a play in several positive Internet industry growth trends,” wrote Justin Post of BofA in a note to clients. He set a $92 price target on the stock, while J.P. Morgan set an $85 price target and UBS set a $90 price target.

I have to wonder if Mr. Post has read the $LNKD S1? Here it is for those who want to. That is the document put out by the company before they go public. In it they say (emphasis mine):

The number of our registered members is higher than the number of actual members, and a substantial majority of our page views are generated by a minority of our members. The number of registered members in our network is higher than the number of actual members because some members have multiple registrations, other members have died or become incapacitated, and others may have registered under fictitious names. Given the challenges inherent in identifying these accounts, we do not have a reliable system to accurately identify the number of actual members, and thus we rely on the number of registered members as our measure of the size of our network. Further, a substantial majority of our members do not visit our website on a monthly basis, and a substantial majority of our page views are generated by a minority of our members.

So, either Mr. Post never read the S1 or he did and is knowingly putting out an exaggerated number the make $LNKD user base appear larger than even the company admits it is. Yes, they have 100M registered members but that number is meaningless if we are attempting to value a company. What we want to know is what number of those use it. The really sad part here is the company admits they have no way to know, but they do know it small minority. Think about that, you are buying shares in a company that does not have a way to determine how many customers it actually has??? Really, think about that…….

So, in all reality, the $LNKD user base is far closer to 25 to 30M (using their terms “substantial majority of our members do not visit our website….” I’ll take that to be 70%-75%. It is probably more, but why quibble. That means we have a company valued today at $8B with about 25M customers. Or, put another way, $LNKD is valued at ~$320 a customer. I define customer as people who use it, if I walk into a grocery store just to look around and do not buy anything, I am not a customer. The same holds for those who just sign up for $LNKD and never use it. I am signed up for numerous sites out there I never use, I signed up, tried it and then never went back. Apparently the majority of $LKND signups did the same (according to $LKND).  That $320 is a big number especially when you consider virtually all of them PAY NOTHING for the service. It is even bigger when you consider in 2010 those 25M regular users accounted for $9.72 each in revenues for $LNKD in 2010. So, the market is saying a $LKND user is worth 32times what $LNKD reports they actually are…..makes perfect sense. If we valued $AAPL the same way, cause, well, they actually make money on each user we would value it at $160B for just the iTunes store users (I am using a 500M iTunes users # from 2007). Knowing that iTunes revenues are ~5% of the total for $AAPL if we extrapolate that out for all its customers in all products, we get to a valuation of $3.2 Trillion for the whole company or $3,500 a share.

Let’s give the deluded banks above the benefit of a doubt and say $LNKD does grow revenues as fast as they think they can.

If we reverse the above valuation game and see what $LNKD would look at if it was value like $AAPL. $AAPL had $65B in revenue in 2010 which means it trades at ~4.5X sales. We clearly can’t use any profitability metrics since well, $LNKD won’t have any until at least 2012 or later (my guess is later) so we use revenues as their focus, and that of the bankers pumping it today is on revenues. Valuing $LNKD the same would give it a valuation of $1B or $10 a share. Let’s assume they double “users” to 50M in 2011 (that means either another 100M “sign ups” at current ratios or a material improvement of current user interaction). Let’s even say they double their rev. per user from $9 to $18, what do we have then? $900M in revenues and a valuation of $4B or 50% of today’s price.

Now, the question is, can they double both metrics? I doubt it in 2011 and even in 2012. But hey, maybe they do……I’ll even give people that the IPO was priced right at around $45 (I think it wasn’t but will play along) and not even outrageous at those levels. All that simply means is shares should come down ~50%……

$LNKD also has no moat. I will say that if Facebook/Twitter comes out with a similar service, turn out the lights on $LKND, but hey, were just talking here right?. The product is not anything special, it is the # of users and both Twitter/Facebook dwarf $LNKD in terms of users. What that means is the $10B opportunity mentioned above is out there for ALL social sites and if it turns out there is $$ to be made there, the big boys will rush into the space. With users already in excess of $LKND, the drain on $LKND will be felt immediately. The flaw in the banks thinking is that $LKND will remain the sole player in the space, that is just flat wrong.