Editor's Choice

Why LinkedIn Is Still Safer Than Facebook

Dana is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Of all the companies that have come out of the social networking boom, LinkedIn (NYSE: LNKD) has flown the highest, and for the longest time.

Since coming public in the spring of 2011, the company has basically run at break-even, albeit with steadily rising revenues. For the quarter ending in September it brought in $253 million, nearly twice the $139 million for the same period a year earlier. Its gross profit is huge, but it all goes out the door, with administration and marketing costs growing as fast as revenues, and an average of nearly 30% of revenues going to research efforts.

The result has been steady growth to $13 billion in market cap. From a low of $63/share near the start of last year, it has recently been trading at over $120/share. Many call it overpriced, but it seems to be climbing that wall of worry and continuing to expand internationally.

Facebook Roller Coaster

Then there's Facebook (NASDAQ: FB). It grabs a lot more headlines, and lately it's been on a roll of its own, going from below $20/share to its current price north of $30. The rise is fueled largely by speculation about its success with mobile – it's now the top mobile app in the U.S. and the most widely used.

Thanks to the movie of the book of its founding, Facebook has been a far better story to the street than LinkedIn. Its IPO was the most anticipated non-Apple story of last year, and the disappointment with it was palpable. But anticipation over earnings acceleration from mobile has many investors jumping on the bandwagon, and its market cap, now $68 billion, is more than five times that of LinkedIn.

So which should you be buying?

LinkedIn the Conservative Choice

If I were to buy either of these, and I wouldn't buy either except on dips, I would plunk for LinkedIn.

The reason is risk.

LinkedIn has carefully marketed itself as a service for business professionals. It has also charged for most of its services, creating a sort of moat separate from the Internet hordes.

In contrast, Facebook faces some enormous legal risks.

Exhibit A. The company's recently announced graph search. Tom Scott, a freelance Internet analyst based in England , recently used it to create a Tumblr page called Actual Facebook Graphic Searches, such as Married People Who Like Prostitutes, Employers of People who Like Racism, and Islamic Men Who Like Men and Live in Tehran, Iran.

Projects like this create real legal risks, risks Facebook probably never knew it was walking into when it created the service. But any enhancement to a service connecting people is bound to be risky, because people engage in risky behavior all the time. A recent TechCrunch article, about Scott's Tumblr, describes these risks well. 

But this is not the only kind of risk Facebook is courting. The company admits it has no way to keep kids younger than 13 from creating profiles on the site, and it's being used by a growing number of debt collectors to harass people. 

Word of Mouse Creates Risk

There isn't just legal risk here, but reputation risk as well. As the perception grows that Facebook is not safe, people pull away from it. When you live by word of mouse, you can die from it just as easily.

By contrast, LinkedIn provides real economic value to its users, and those professionals who abuse it are quickly shunned by others. Reputation risk goes to the user, not the site, at LinkedIn, and this makes it feel less risky.

Over time this matters. Over time, of course, both people and companies mature, and perhaps the errors of millions on Facebook will make us all more forgiving of youth's mistakes. Perhaps.

But do you want to put money on that? When Facebook's risks become more manifest, I expect a sympathetic pullback from the entire social space, including LinkedIn. You want to find an entry point after that, and can probably ride this stock for a good long time afterward.  

DanaFBlankenhorn has no position in any stocks mentioned. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of Facebook and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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