We initiated a position in LinkedIn, the world’s leading professional social network, after the stock declined precipitously in reaction to weaker-than-expected full-year revenue guidance. In our view, the sell-off in LinkedIn’s stock, in which it shed nearly half of its value in one day, was a severe over-reaction when measured against the company’s strong long-term growth potential, its unrivaled competitive position and the attractive economics of its core Software as a Service (SaaS) offerings. Powered by network effects as well as the quality and breadth of its member data, LinkedIn pioneered the concept of “passive recruiting” at a previously unattainable scale, drawing from its approximately 430 million members. In doing so, LinkedIn created a unique, highly profitable subscription-based suite of services that enables corporations to search and communicate with talent, post jobs and market their own enterprises. At our initial purchase price, LinkedIn (NYSE:LNKD) appeared substantially undervalued relative to other business service and Internet companies on an enterprise value-to-sales ratio. However, the high margins of its core employment services business were being masked by heavy investment spending in earlier stage adjacent businesses, which drastically reduced its reported earnings. In our assessment, we were able to purchase LinkedIn’s still rapidly growing core business at a highly discounted valuation while essentially treating the other investments as cheap call options. On June 13, Microsoft (NASDAQ:MSFT) announced an agreement to acquire LinkedIn for $196 per share, a price that is consistent with our thesis and estimate of fair value. While it’s unusual for one of our holdings to reach our estimate of fair value so quickly after purchase, we’re obviously pleased when a strategic buyer sees the same value that we do.
From Bill Nygren (Trades, Portfolio)'s Oakmark Fund second quarter 2016 commentary.
