LinkedIn – Model Price Math

LinkedIn (LNKD) reported their December quarter and yearend results Thursday night.  These results were viewed positively, obviously with good market action on Friday, especially on a down market day.  Let’s have a look at the Model Price chart with LNKD’s December balance sheet.

LinkedIn with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of LNKD subsequent to this post will be maintained on Facebook, here.)

Some observations:

1.         Calculated model price on Friday was $15.17.  We will see in the coming days whether analysts’ will increase LNKD earnings estimates further, based on management’s comments and/or metrics in the social media’s space.  As earnings estimates increase so will model price.

2.         As we pointed out on the chart above, witness the growth in model price.  Model price has more the doubled in the last six months.  That’s why investors are paying such a premium – 14 times book value.  Or, having fun with algebra – LNKD would have to be earning $3.03 per share, with its current balance sheet, to have a model price of $90 per share.

3.         LNKD is trading at EBV+8.  What does this mean for Facebook (FB)?  As we noted in a previous post FB just broke through EBV+7.  Since Wall Street views LNKD as the pale cousin to FB, this means FB could go substantially higher!  (Remember EBV+8 on FB is $70 a share.)

4.         A little inside baseball here, however look at the weekly price bars of LNKD versus GRPN.  Do you see the difference?  LNKD has less variability or volatility than GRPN.  This has to do with convexity.  GRPN’s convexity is 18.90 versus LNKD’s at 3.40.  So to an investor or portfolio manager GRPN and LNKD may have the same rates of return over a certain period of time however GRPN’s return will be considerable more variable which is undesirable to most professional investors. (Note to GRPN’s management!)

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