Lance —
I think you misunderstand or misinterpret some of the financial accounting concepts here, like the meaning of amortization/deduction/writeoff of intangible assets and goodwill, which leads you to some wrongheaded conclusions about the LinkedIn/Microsoft integration.
Regardless, “LinkedIn Is a Snowflake” covers some of the objective and subjective evaluations of the deal. Strategic qualifications aside, consider the quantitative opportunity costs at the time of Microsoft’s bid to acquire LinkedIn:
But, the next question is whether or not [LinkedIn is] worth $26.2B…
Listen, Microsoft has $106B in cash that’s giving it a zero ROA. Consensus has Microsoft growing EPS 8.25% over the long term, with an ROE ~14.4%, a forward earnings yield ~5.35%, and EBITDA yield ~10.35%. So, Microsoft’s cash represents a drag at 0% yield, hence, deploying that cash into an investment with some terminal value is worth-its-while.
Opportunity costs (i.e. the next best options) are what Microsoft really had to debate, so consider the whole LinkedIn package…
LinkedIn’s growth [was] consensus 10.7% ROE (2017e), 27.34% long term EPS growth, ~4.2% EBITDA yield, $7B in revenue (2020e), and $2.3B in EBITDA (2020e).
Now, with the benefit of hindsight, the entire Microsoft conglomerate reported $29.1B in 2019FQ1 revenue (+18.5% yoy), which was the most recent quarter, following the one you highlighted. Its fastest-growing segment, Commercial Cloud, reported $8.5B in revenue (+46.6% yoy), including Office 365 (+36% yoy) and LinkedIn (+33% yoy at $1.53B). So, LinkedIn is a meaningful contributor to both growth (outperforming consolidated by +14.3pp) and revenue (5.3% of total revenue and 18% of segment).
Since the deal closed, LinkedIn as a standalone entity has materially increased both its own revenue (+571% from the first full quarter of consolidated reporting) and its own gross margin (filings mention subjectively that the broad segment’s gross profit growth is outpacing opex growth, attributable to LinkedIn and Office 365: “Gross margin increased [by] 18%, driven by growth in Office Commercial and LinkedIn [including] gross margin percentage improvement in LinkedIn and Office 365.”)
There’s just nothing in there to complain about yet…
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