![]() That's about 75% downside from current levels. Even if you think LinkedIn will build a nicely profitable multi-billion-dollar business, if the company's growth slows, the stock's valuation will probably fall to 5X-7X revenues (this is where Google currently trades). On the bearish side, meanwhile, there are an alarming number of things that can go wrong. (To buy the stock at this level, I'd like to see a probable long-term return of 5X, not 2X). And it's not actually a huge amount of upside for LinkedIn investors, even if the investor is right, especially on a risk-adjusted basis. Eventually, when the years of hyper-growth are over, most stocks trade for 20X earnings or lower, no matter what business they're in.). It also counts on the valuations for other software-as-a-service companies staying super-high (Open Table is trading at ~90X this year's estimated earnings, which is almost certainly not sustainable. That is a very bullish view, and it counts on lots of things going right. Using current market multiples for software-as-a-service companies, the investor thinks that scenario makes the stock worth about $125 now and $170 in a couple of years. On the bullish side, one LinkedIn investor has laid out a scenario in which LinkedIn could earn $3.50 a share in four years (2015). ![]() If you start thinking of LinkedIn as "Facebook for professionals," and then you observe that LinkedIn is now valued at $10 billion versus Facebook's $80 billion, you can see that there might still be a big growth story here. Generally, professionals are easier to make money off of than consumers, so LinkedIn will presumably be able to make a lot more money per user than Facebook (it already is). LinkedIn is still primarily a US company, so it can presumably expand to Europe, Asia, Latin America, and other regions. How could LinkedIn possibly be worth more than $100 a share? The most bullish scenario for LinkedIn is that it's " Facebook for professionals" and that it has only just begun its growth curve. There are also some future scenarios in which LinkedIn is worth a lot less than $100 a share. There are some future scenarios in which LinkedIn is worth a lot more than $100 a share. If they're wrong about it, they'll get clobbered. So, at the current valuation, investors are taking the future profitability on faith. LinkedIn is growing very quickly, and some smart investors believe that LinkedIn will eventually have super-high profit margins, but the company has yet to demonstrate this yet. Some companies do trade at ~20-times revenue, but only extraordinarily profitable companies that are growing extremely quickly. ![]() The stock is trading at about 20-times this year's expected revenue of ~$500 million. There's one thing we can say for certain: LinkedIn's valuation relative to its current and near-term expected performance is very aggressive.
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