Determining the value of a company can be very interesting. You may want to determine the worth of your company or competitors, for potential sale, acquisition or otherwise. Valuations of private companies are obviously more difficult than public companies and there are algorithms to follow for private. I wanted to look at two public companies that I find very interesting. The formula for a public companies valuation is quite easy, you simply multiply the total number of outstanding shares by the current share price. Therefore the valuation varies constantly.
LinkeIn vs. Netflix
Here are two companies that are in the news now and both have online presences, LinkedIn is entirely online and Netflix which began as solely a ‘by-mail’ movie rental company to also have a significant online presence. Now compare their current public valuations based on their market cap. This figure is found by taking the stock price and multiplying it by the total number of shares outstanding.
- LinkedIn : $10 Billion
- Netflix : $14 Billion
Both of those valuations are quite large. That is based on their market capitalization, which is based on share price. Share price is based on what individuals believe it is worth, either now or their speculation on what it will be worth in the future.
Valuations High or Low?
What is most interesting is the price to earnings of each company. In other words how much money are these companies actually making. The price to earnings is their P/E.
- LinkedIn P/E : 1,264
- Netflix P/E : 82
For the quarter ending March 31st, LinedIn made $5.38 per share. Netflix on the other hand made $45.48 per share. As you can see there is a huge difference between the amount or earnings per share Netflix makes and LinkedIn makes. You have to wonder how the market is valuing LinkedIn as opposed to Netflix. Only time will tell.
* the above information is based on intraday values on 7/18/11