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«Equity Valuation LinkedIn Corp José Miguel de Figueiredo Bettencourt Moreira da Silva Student Number: 152414022 Instructor: José Carlos Tudela ...»

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One can argue that the difficulty in creating a global network such as LinkedIn was able to create over the years can minimize to some extent the possibility of new entrants. On the other hand, established companies in this market, which are now more comfortable with fixed costs and enjoying economies of scale, enjoy a clear advantage, in the case a new entrant decides to come forth. Moreover, companies such as LinkedIn had the opportunity to build strong and trustful relationships with both companies and professionals as well as become a well-known multi-lingual brand on the PNS sector (in which switching costs for companies is high). These previous factors managed to create a high barrier of entry for newcomers.

However, the initial investment to enter this market is relatively low, being moderately easy to find investors, especially if a newcomer wants to take its activity to developing countries, where the potential growth of this market is even higher. Also, existing SNS have economies of scope over PNS, adding to the fact that SNS are traditionally used to having much more users (Facebook, for example) and dealing with the more demanding Internet traffic (in both terms of cost efficiency and performance). These SNS can

LinkedIn Corp Equity Valuation

constitute a threat if they develop features specifically for this market or by aligning themselves with new players and take advantage of their large database. Finally, there is also the probability of new job services and companies deeply related to technology (Microsoft, for instance) that can take advantage of their financial resources and experience in dealing with huge databases and traffic. Therefore, the threat of new entrants is moderate-to-high.

2.2.4 Bargaining Power of Buyers

Customers in PNS are mainly individuals/professionals and companies and neither segment is concentrated. On the other hand, in the PNS sector, LinkedIn is leading rather comfortably, which makes it more famous and reliable than its competitors, helping the current users to stay. Also, LinkedIn, by providing innovative services and showing adaptability to market trends, allows it to keep leading this market.

However, the good reputation that companies such as LinkedIn enjoy took many years to build, but it can end very swiftly with a small decrease in performance or quality.

Therefore, taking everything into consideration, the bargain power in the customer side is low-to-moderate.

2.2.5 Suppliers’ Bargaining Power

In this industry there are many suitable service providers. There are database services, mobile and applications that can fulfill companies’ requirements and that can be ultimately bought (LinkedIn acquired Bizo and Refresh.io, for example). On the other hand, professionals and companies can build their own network and connect to each other worldwide. Therefore, the suppliers’ bargaining power is relatively low.

2.3 Company Overview LinkedIn is a Professional Networking Service and it is mostly used for professional networking. It was founded in 2003 and most of its revenues come from access to information about users by recruiters. Nowadays it has over 400 Million users, evolving from 20 Million in (2006) and it is present in more than 200 countries. In 2013 it had 184 Million unique visitors worldwide and revenues in 2014 hit 2.2 Billion Dollars mark. It is the undisputed leader in the PNS sector, although it also competes in some aspects with

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the SNS sector. To further understand the company’s capabilities and downfalls, a SWOT Analysis will be presented in the next sub-topic.

2.4 SWOT Analysis 2.4.1 Strengths First of all, the company has enough financial resources to fund their projects and investments, which means that they do not require external investment or incurs in debt.

Secondly, LinkedIn is a reliable and premium professional networking service, where a study from ROI research shows that 59% of the answers stated that LinkedIn was their most useful and main social network account, and 87% used LinkedIn as a tool to decide between candidates, job offers and companies. Thirdly, the company has several different revenue streams such as premium accounts, advertisements and job postings. Fourthly, it enjoys the position of first-mover and undisputed leadership in the market, which allows it to watch trends worldwide and try to establish some of their own. Finally, it is present in more than 200 countries (globally) and encompasses a wide range of professionals.

2.4.2 Weaknesses

The first weakness is related to privacy concerns and security issues: since users share personal information, this information must be secured. However, in 2012, 6.5 Million passwords were posted online by hackers, showing a considerable security breach.

Secondly, the cultural differences and weak acceptance outside United States, Canada and the UK show a weak penetration of LinkedIn, with special attention being placed in China and India (7.72% in India for example). Also, the tradeoff between LinkedIn and SNS is not very solid (only 2% of Facebook users have LinkedIn accounts, but 40% of LinkedIn users have Facebook accounts) as well as the amount of time spent (LinkedIn averages 6.5 minutes/user/day, while Facebook averages more than 55 minutes/user/day).

2.4.3 Opportunities Everyone is a potential customer.

Any person (or organization) looking for a job (or a candidate), respectively, is a potential customer. On the other hand, LinkedIn being the leader in the PNS industry, is the most qualified to tap into the Asian and Indian market, where it is currently struggling in terms of users. Moreover, professional videos, training and experience feedback can be LinkedIn Corp Equity Valuation presented in the website, exploring more of the Social Networking Service (despite still being business-oriented) sector. Finally, using Internet in everyday activities has increasingly become more and more popular: candidates can be chosen more often from PNS than by sending CVs and motivational letters.

2.4.4 Threats

The possibility of new competition either thanks to new services or social networks bridging the gap between social and professional oriented can lead to a much more competitive market for LinkedIn. On the other hand, as previously mentioned, the good reputation acquired by LinkedIn can disappear very swiftly. Furthermore, many candidates could be hired by other methods than PNS. Also, users can state unreliable information and inaccurate data, undermining the whole hiring process. Finally, XING can have easier access to the Asian market and when LinkedIn tries to focus on both companies and individuals/professionals, it can unintentionally alienate one or the other.

2.5 Future Expectations LinkedIn aspires to create a comprehensive display of all job positions available worldwide, the skills needed to apply for that position and what expected from candidates, making the work environment more transparent. In terms of investments, they will be applied in technology structure (performance, security, etc.), product development (better features and more innovative products); sales and marketing; international expansion to enlarge the member database; legal and accounting expenses due to its global presence and being a public company.

LinkedIn Corp Equity Valuation

3 Methodology In this chapter I will present the data and methodologies relevant for the development of my model and subsequent valuation. The next 4 chapters will be divided as follows; the first chapter focuses on the forecasts and assumptions made in order to achieve the necessary data about LinkedIn’s future prospects7; the following chapter is the model results, through both the multiples and APV approaches; the third chapter is focused on sensitivity analysis, the possible variations in the outcomes of the aforementioned approaches; finally the fourth chapter compares the results of this thesis with those of an equity research report on LinkedIn by J. P. Morgan.

3.1 Forecasts This section is a fundamental part of the valuation process. In order to achieve a robust price target for a company you must be able to accurately forecast its future prospects to understand their value today. The goal of the next few pages is to explain the assumptions and thought process behind the forecasts by going over the main figures of both the income statement and balance sheet that impacted the final values obtained.

3.1.1 Revenues Revenues are the key item in most forecasts as they impact the entire income statement and are the first step in the cash flow estimation. Therefore, reaching a robust revenue estimation is a major part of obtaining a well-rounded valuation.

For the specific case of LinkedIn there are several points to take into consideration.

Firstly, LinkedIn has only been publicly traded for a few years, so there isn’t much in terms of historical data so as to infer future growth prospects or performance.

Secondly, it is experiencing high growth therefore we cannot take the average of the last few years as a reasonable growth rate for the future and furthermore implies that we need to have a relatively wide window of estimation in order to look towards LinkedIn’s stabilization period.

For LinkedIn’s historical and forecasted Income Statements, Balance Sheets and Cash Flow Statements

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Finally, LinkedIn is the most mature company (in terms of market penetration and product development) in its specific market, therefore we cannot look towards similar companies’ history to infer a possibly similar evolution for LinkedIn.

To address the issue of LinkedIn’s current growth the forecast period will take place until 2025 to take into consideration a high growth and stabilization period. Which will allow for an appropriate calculation of the company’s terminal value.

LinkedIn’s revenue sources were broken down to allow easier analysis. The company’s revenues stem from 3 sources: Talent Solutions, Marketing Solutions and Premium Subscriptions.

19% 59% 22%

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Talent Solutions “aim to be the most effective way for enterprises and professional organizations to efficiently identify and acquire the right talent for their needs.” 8 It comprises all products LinkedIn has available for companies and individuals in terms of job postings and search engines within the platform.

LinkedIn’s Learning department, which was started with the acquisition of Lynda.com a web-based learning platform, is also included in Talent Solutions. Its goal is to provide users with the tools to develop new skills and reach a wider student market.

Historically speaking Talent Solutions has represented more than half of total revenues.

It is expected that this source of revenue maintains its status as main cash flow provider, From LinkedIn Annual Report 2014

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given the investments made by the company in sales force and training and the future prospects set forth in the annual report.

Marketing Solutions (which are usually the main revenue source in Social Media companies) is expected to grow more rapidly due to the shift in focus towards advertising.

The company has the goal to truly take advantage of advertising spaces (up to 2014 the mobile app was poorly optimized for advertisement – a major deterrent to possible clients).

Premium Subscriptions are broken down into two sources: LinkedIn’s subscription Service and the new Sales Navigator product. The company’s subscription packages are “designed for general professionals to manage their professional identity, grow their networks and connect with talent.”9 Whereas Sales Navigator is a tool for users to quickly manage and take advantage of new opportunities within LinkedIn’s user database.

Premium Subscriptions are the lowest revenue source and given its specificity the company hasn’t presented any plans to leverage these results so it is expectable that it grows constantly with the user base.

Sales Navigator is a diversification move for LinkedIn and, while it still represents a relatively small portion of total revenues, presents high synergy potential with the platform. Since it is quite recent, future growth can only be estimated based on potential future market capitalization.

As for the growth rates applied to the revenue forecast, it was not reasonable to estimate this figure from past results nor are there mature peers from whom to extrapolate these values. Furthermore, given lack of information disclosed regarding number of clients and revenue per client, growth through client growth would be far too speculative.

Hence, the path chosen was to look at LinkedIn’s potential market by revenue source (made available by LinkedIn) and estimate the company’s market capitalization per market in steady state.

From LinkedIn Annual Report 2014

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The potential and current market of premium subscriptions isn’t represented in Chart 1 due to it not being linked to a dollar weighted market cap. Potential market in terms of membership is total world labor force, currently at 3,4 billion, of which LinkedIn has around 400 million registered members representing a ~12% market penetration.

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Table 2 was built taking potential market value estimated by LinkedIn in 2015 and applying the average World GDP up until 2025.

For member growth we assume that LinkedIn will continue its current growth ratio effectively doubling its current 400million user base to 800million by 2025. This growth’s direct impact will be in percentage of users signing up for premium subscriptions, doubling current value up until 2025.

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However, in order to achieve more robustness with this sort of analysis, 3 different revenue scenarios will be studied in the sensitivity analysis section so as to cover a wider range of outcomes.

For the purposes of this chapter only one scenario will be analyzed – the Base Case. This scenario will be a mix between optimistic and realistic assumptions on the future revenue streams of LinkedIn.

This Base Case estimates that by maturity LinkedIn will achieve the following market


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