Why Linkedin Corporation (LNKD) is Like Digital Film

What does it mean for the investor? Now might be a good time to re-evaluate any investments you have in recruitment companies. Those at the low end that evade LinkedIn’s high-end assault might have short respite if Facebook succeeds at the low end.

Linkedin Corporation (NYSE:LNKD) looks to have a huge growth runway in front of it as a business, but what about the stock? Let’s roll some numbers, and keep it simple. If the company can grow the current turnover of just under $1 billion to $10 billion in the next five years and make a net margin of 10%, equating to $1 billion profit, then that would translate to a p/e of 17.5 at the current market cap of $17.5 billion (by keeping the market cap constant we assume no change in share price). So, holding our other assumptions constant, for a doubling of share price in 5 years we get a P/E of 35, or for a trebling we get a P/E of 52. Of course any or all of these assumptions could be wildly out: you might think that a lower turnover with a higher retained margin would be more likely, but I have purposefully tried to keep the numbers simple. Make a judgment call and decide. In any event, some would argue that the recent jump in share price makes this a good time to watch and wait for a better valuation.

My decision to buy was not made by studying numbers. LinkedIn solved my recruitment problem, and, immediately, I recognized a company that could be hugely disruptive to an existing industry. Such opportunities are rare, so I decided to pull the trigger and ask questions later. Luckily for me, the decision was vindicated by the subsequent earnings and price movement.

It will be interesting to see how this one develops…

The article Why LinkedIn Is Like Digital Film originally appeared on Fool.com and is written by Ian Richards.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.