LinkedIn (LNKD) posted solid second-quarter results Thursday, but we maintain that the price the market has put on this company makes very little sense. We’re increasing our fair value estimate to $55 per share from $45 per share primarily on the back of higher expected EBITDA for this year versus our original expectations.
Revenue growth for its second quarter more than doubled, and the firm snuck in a $0.04 GAAP EPS profit in the period – not the magnitude we’d expect from a $100-plus per share stock, no matter how optimistic its growth prospects. To get such an inflated multiple, LinkedIn should have to earn it, and a quarter of outperformance is hardly enough. Member growth was over 60% in the period, while unique visitors and page views also showed nice growth. Revenue from hiring solutions almost tripled, while sales for its marketing solutions and premium subscriptions more than doubled and increased 60%, respectively. We were looking for hiring solutions to expand 150%, marketing solutions to increase 90%, and premium subscriptions to jump about 50% in the period – so LinkedIn outperformed across the board. With such growth, the firm’s EBITDA margin came in significantly higher than our expectations (up 1 percentage point versus last year), to 22% in the period. We were only looking for about 11% for this year on higher investment and overhead expenses. Long term, we’re forecasting the firm’s EBITDA margin to reach 27%, so LinkedIn still has a lot to prove to earn our fair value estimate (which is half its stock price).
LinkedIn also provided guidance for the full year 2011. It expects revenue to be in the range of $475 to $485 million, slightly lower than our $496 million estimate, and adjusted EBITDA between $65 and $70 million, which is materially higher than our $52 million estimate—the higher EBITDA for this year and next accounts for the main driver behind our $10 fair value estimate revision. In all, we were impressed with LinkedIn’s quarter, but its stock price has disconnected significantly from its intrinsic value. If LinkedIn’s price advances beyond $120 per share, we’d look to initiate a put position in our Best Ideas portfolio.