| I don't know anything about Linkedin, but PE can be deceiving and let me explain how. First, P/E ratio is the Market Cap/Earnings (earnings = profit) The basic way to get earnings is to subtract all expenses from revenue. (this is an overly simplistic definition, but it is mostly right, almost all the time). So you have:
Gross Revenue - Expenses = Earnings What is left out of this simple definition is "operating leverage". Operating leverage is the concept that you have a set of costs that don't move much no matter how much your revenue moves. Most internet companies have a lot of operating leverage. So lets take a hypothetical company: Quarter 1: (Revenue) $100m - (Expenses) $99M = (Earnings) $1M ..... All with a market cap of $100m, the P/E would be 100. Now, if expenses are mostly fixed, (think lots of engineers salaries which have most everything running in macros etc.) and the revenue increases by 5% what is the new PE? Q2
$105m - $99m = $6m .... all with a market cap of $100m, the new P/E would be about market average of 16.66 --You could do the same example if you drop your long term projections on R&D, or acquisitions or any number of expenses. |