Linkedin is Overvalued – But what is Value? (Analytics thought of the Day, July 14th, 2011)

If you would know the value of money, go and try to borrow some.

- Ben Franklin

Google had some good news for investors and this is evident in after hours trading. For people who never took a finance class the value of a public company or its ‘Market Cap’, short for ‘Market Capitalization‘ (if you tried to take it over there’d probably be a premium but ignore this) is the # of shares multiplied by the stock price. In this case, 322MM * $596 gives you $192,000,000,000 or 192 Billion. Note the Mkt cap as of market close is only 170 Billion. Hmmmm, so Google gained 22 billion in a few hours. AdWords is a great product. Now, we’ll see if these gains hold through tomorrow morning’s trading volume given that it’s a sunny day in July and Wall Street is on vacation if it ever is.

Let’s consider the fate for a moment of another ‘top of mind’ technology company that you likely use frequently, Linkedin.com.

Linkedin went public several weeks ago and its price doubled that same day. It’s been hovering around this price ever since and appears to be worth about $10,000,000,000 or 10 Billion. Notice the P/E which is the price to earnings ratio or to be more precise, it’s the price of one share divided by the earnings per share:

share price / [net income/# shares outstanding] = P/E

Google’s P/E is 20.5

Linkedin’s P/E is 2,862

In Google’s recent earnings release Q2 earnings were up 36%! Larry Page cited a 18% increase in paid clicks and a 12% increase in CPC.

Obviously, you’ll pay more for earnings if the company is growing quicker than most other companies, or your alternative investment. Above, based upon analyst estimates we see the PEG ratios (price earnings to growth). Google’s PEG is 1.14 indicating a slight premium on the stock while Linkedin is showing 27.5, even with a 104% 5-yr growth estimate! So, the question is not IF, it’s WHEN. When will Linkedin tank? One bad earnings release and there will be blood. One bad statement from an exec and shares will be demolished. This is not very robust, not at all.

Let’s compare short interest as a % of float: Google 1.5% and Linkedin 7.3% as of end of June (appears to be climbing). Short interest is a reasonably good leading indicator of future share price and initially it was nearly impossible to get Linkedin shares to borrow, as to short.

Changing gears a bit, Facebook’s apparent private value is $84,000,000,000 or 84 Billion. That’s a lot to ‘Like’. 2011 display revenue is estimated to be 4 Billion which puts a $100 billion valuation at 25x sales. Goog’s price to sales ratio is about 5.5x. Display revenue is a function of eyeballs and I’m not sure whether Facebook can double or triple ad impressions anytime soon (beg to differ, feel free).

Where am I going with all this you might ask? Well, to this point – when there’s so much variability in the valuation of ‘well understood’ companies and business models, why is it ever confusing to you, the decision maker in your business, what to do to drive growth and higher performance? Frankly, it’s not surprising. If you’re at the bleeding edge of performance already you’re going to have to test new ideas using randomized testing. If you have a website this means AB testing. Surely you know more about your business than a bunch of financial analysts parroting estimates from the head of investor relations and crunching some junk in Excel? Do you? Maybe it’s time to hedge against poor performance and get your analytics program straightened out – yes, that’s where we come in!

Before I checkout – when Omniture sold to Adobe the transaction was valued at 1.8 Billion. People often asked me whether Google Analytics was better than Omniture and I’d occasionally say; “Google is worth around 170 billion, Omniture, 1.2 billion…their analytics product is designed to help support the world’s largest ad network…all depends”.

Got a message on Linkedin, gotta run!

Jeff

http://www.linkedin.com/in/jeffjames