LinkedIn's Billion-Dollar Share Sale: Should You Be Buying?

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You've come a long way, LinkedIn!
What a difference two years makes! Back in November 2011, when professional-networking site LinkedIn (NYSE: LNKD  ) pursued a secondary share sale, it was unable to raise the $100 million it was aiming for (the company had to settle for $88 million.) Yesterday, the company filed a prospectus for a $1 billion stock offering that grants the underwriters the option to purchase another $150 million of shares.

Since the 2011 offering, LinkedIn's shares have more than tripled:

LNKD Chart

LNKD data by YCharts.

According to the offering prospectus, "The principal purposes of this offering are to increase our financial flexibility and to further strengthen our balance sheet."

Really? Because with $873 million in cash and equivalents and zero debt (as of June 30), that balance sheet looks pretty darn strong already -- particularly when one considers that the business is solidly profitable, generating nearly $240 million in free cash flow over the past 12 months. Indeed, the company itself admits that "based on our current cash and cash equivalents balance together with cash generated from operations, we do not expect that we will have to utilize any of the net proceeds to us of this offering to fund our operations during the next 12 months."

All of which makes the following language sound like boilerplate: "As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us of this offering. However, we currently intend to use the net proceeds to us from this offering primarily for general corporate purposes, including working capital, further expansion of our product development..." and blah blah blah, etc.

However, this looks a bit more interesting: "We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, although we have no present commitments or agreements to enter into any acquisitions or investments."

After all, LinkedIn has already made several acquisitions, including mobile newsreader Pulse and online presentations site SlideShare. For my money, LinkedIn is building a war chest for just such bolt-on acquisitions.

LinkedIn is a terrific business with a genuine competitive advantage in the network effect: If you were going to join a professional networking site today, why would you consider joining any site other than LinkedIn, unless you are in an extremely esoteric field? Similarly, once you've joined, why would you consider defecting to another site?

Does this mean you should be buying the stock today? Not so fast! When a company is selling shares, it usually selects a time when it will get more than its money's worth (assuming it isn't in financial distress, which isn't the case here). At 143 times estimated earnings per share for the next 12 months, I'd recommend investors consider the sort of growth that is embedded in that multiple before buying the shares.

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  • Report this Comment On September 04, 2013, at 10:57 AM, BuddyCPA wrote:

    Does anyone know what the offering price of these new shares will be?

    It would seem that the stock will fall to an amount that is close to the new offering price and as such, I would not be a buyer until that offering price is known.

  • Report this Comment On September 04, 2013, at 12:13 PM, jsn1080 wrote:

    LNKD stock valuation is reminiscient of 1999 .com valuations - ridiculous. Really, someone is willing to pay $240 for $0.35 of TTM earnings. With the imminent dilution of shares, how soon will LNKD earnings reach $12 or $24 - maybe a decade if shareholders are lucky. If earnings do hit $12, do you really think the market will be willing to sustain the same trailing P/E ratio of 600+ or the forward P/E of 118? I think not, and if I am right, then even if the earnings did reach between $12 adn $24 in the next decade, then I bet investors will still be value the company a $240 share equivalent ($27B company as a whole). I'd rather buy Norfolk Southern Railroad (NSC) for $23B (or a portion thereof) and still have a few billion left over.

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