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by jcampbell1 5166 days ago
P/E is market cap divided by profits. Your comment about increasing revenues by 50x is non-sensical.

Consider a company with $100M in revenue, $1M in profit, and a market cap of $1B. PE is 1000. Now say this company has a shot at doubling revenue in the next few years without incurring additional cost. They will then have $200M in revenue, $101M in profit, and the PE will be 10.

Just looking at P/E in isolation is like judging a programmer by how fast they can type. You need to take a broader approach to reading financials and understanding the underlying business.

I haven't followed LinkedIn close enough to have an opinion on the current valuation. You may be right that it is overvalued, but the PE ratio isn't a very good indicator in isolation of expected future earnings.
1 comments
blantonl 5166 days ago
Consider a company with $100M in revenue, $1M in profit, and a market cap of $1B. PE is 1000. Now say this company has a shot at doubling revenue in the next few years without incurring additional cost. They will then have $200M in revenue, $101M in profit, and the PE will be 10.

Can someone provide a concrete example of a company that has doubled revenue in a few years without incurring additional cost? I realize that it is possible, but I'd love to see where this has actually occurred.

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jcampbell1 5166 days ago
It is uncommon in most industries, but quite common in pharma and theoretically possible in tech. I am not in front of a bloomberg terminal, but off hand I believe Google doubled its quarterly revenue in 1 year. Something like $800M-> $1.5B and added just 2000 employees[1]. That is why the stock went from $110->$400 in the first year of being public.

It is not uncommon for small pharma companies to have 1000% increases in revenue with little cost increase, especially if the companies don't manufacture or do marketing and just take royalies from big pharma.

[1] My memory is not perfect, but I was invested at the time and paying close attention. I remember being blown away that their revenues doubled and they only cost they added to the business was mostly non-search related activities.

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apaprocki 5161 days ago
Google listed on 8/19/04. Q4'04 revenue 1031.50M, Q4'05 revenue 1919.09M. Cost of revenue doubled too, 362.10M to 655.16M.
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