GRPN LNKD

GRPN Valuation:

1/ The big picture is this:

• Groupon generated ~$300 million of revenue last year and should generate about $1.7 billion of revenue this year.
• Groupon is now operating basically at break-even, with the North American business earning a modest profit and the international business losing a modest amount.
• Groupon is cash-flow positive and has ~$1 billion in the bank
• Groupon's growth rate is decelerating sharply, and this deceleration is likely to continue for at least several more quarters.

Based on my experience (15 or so years of following tech stocks), that last factor is very important. "Momentum" investors HATE deceleration. And momentum investors have a big impact on the prices at which stocks trade. So we need to keep the deceleration in mind.

In fact, let's start with the deceleration, because it will have a big impact on our fundamental estimates for the next couple of years.

2/ The reason Groupon's growth is decelerating is:

1. the law of large numbers — the company's already huge, and
2. the company is cutting back on marketing spending

The second factor is very important. To become meaningfully profitable, Groupon will have to continue to clamp down on marketing. And this will likely lead to further deceleration.

3/  Price Forecast: So what does that give us for preliminary estimates?

2012
Revenue: ~$2.5 billion
Operating Profit (assuming 10% margin): $250 million
Net Income (assuming 35% tax rate): ~$150 million

2013
Revenue: ~$3 billion
Operating Profit (assuming 15% margin): ~$450 million
Net Income (assuming 35% tax rate): ~$300 million

So what might the stock be "worth" on those estimates?

A fast-growing market-leader with a huge global opportunity should eventually trade at 20X-30X earnings. More in the early years, when the growth rate is faster and the company has not yet achieved its steady-state profit margin, less in the later years.

So if Groupon were to trade at, say, 20X-30X 2013 earnings of $300 million, it would trade in a valuation range of $6 billion to $9 billion, with a central value of $7.5 billion. This would equate to a range of about $9-$13 per share.

Notably, that's well below where the stock is trading.

So ... Groupon Already Looks Overvalued

4/ Historical Perspective : Amazon
From 1996-2000, Amazon grew like a bat out of hell, in part because it was spending boatloads of money on marketing. In 2000, however, the funding markets for unprofitable Internet companies dried up, and Amazon had to change tack and focus on becoming profitable. This transition took two years, from 2000-2002. It led to major deceleration in the business. And it was absolutely brutal on Amazon's stock price.

Specifically, as Amazon cut back on marketing spending and other profligate expenses in its drive to become profitable, the stock collapsed more than 95%, from $100+ to, if memory serves, about $6 a share.  See the right half of the chart below.

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LNKD

LinkedIn netted a pair of stock-recommendations rating upgrades from Morgan Stanley and J.P. Morgan Chase & Co. Tuesday, while Bank of America Merrill Lynch raised its 2012 and 2013 earnings and sales estimates.

All three banks served as underwriters for LinkedIn's initial public offering in May. Morgan Stanley Investment Management Inc. holds nearly a quarter of LinkedIn's shares valued at roughly $1.6 billion and is LinkedIn's largest shareholder, according to FactSet.

Shares of LinkedIn rose 4.5% to $73.10 afternoon trading Tuesday, up 62% from their IPO price of $45.

Through Monday, LinkedIn's shares had tumbled 20% since the company announced its secondary stock offering on Nov. 3.

LinkedIn's float could triple to 28 million from 9 million by the end of the year, according to Evercore Partners. More than 8 million shares are likely to come to market in February, with the expiration of additional lock-up extensions.

Morgan Stanley raised its stock-recommendation rating to "overweight" from "equalweight" and established a 12-month price target of $100, the highest among all analysts, according to FactSet.

J.P. Morgan Chase & Co. analyst Doug Anmuth raised LinkedIn's stock recommendation to "overweight" form "neutral," but lowered its 12-month price target $84 from $98, noting that the recent stock declines make the stock's current price "more compelling."

Bank of America Merrill Lynch analyst Justin Post raised estimates for LinkedIn's 2012 and 2013 revenue forecast by 7.6% and 8%, respectively. Bank of America kept its "buy" rating on LinkedIn's shares, and maintained a $92 price target.