I. Assumptions underlying the market valuation

End of July 7, 2011 LinkedIn price closed at $94, more than double its IPO of $45. It all started on 19 May 2011, when most od media published the headline like ‘LinkedIn stock more than doubles in IPO’. On this very day Jeffrey Weiner, LinkedIn’s CEO, answer to the question of Bloomberg ‘Do you think you left some money on the table Jeff with a price of $45?’ Answer ‘We are in for the long-term’. What does this mean exactly? The market was still finding the real price, as we can see on page 11 Exhibit 1 the price then dropped, around 21 of June 2011 the price rises again.
Before hitting the key assumptions, it is good to also have a look at the Exhibit 2 on page 12. LinkedIn has been making net losses before 2010, with an exception in 2007. 2010 was an exceptional year with high growth rate, the market was changing. Early 2011 it had over 100 members over 200 countries and was growing at 1mil new members every 10 days. This was just the right time for the IPO.
The key assumptions underlying the market price of July 7, 2011:
a) The market assumed that LinkedIn would growth, at higher rate than 2010. Growth in all aspects, number of members and revenue. In fact since $94 was greater than the value in Exhibit 17 by JP Morgan and Morgan Stanley, this implies that the market expected a higher terminal growth rate of 6% (assuming market had the same assumption about cost of capital). Terminal growth rate meant the company would grow at the rate >6% until infinity, which was pretty high.
b) On page 2 we see that 200mil out of the 350 mil IPO proceeds went into general business development purposes. The market assumed that LinkedIn would be able to develop scalable, high performance technology infrastructure that would efficiently and reliably handle increased member usage globally, as well as the deployment of new