![]() 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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