Could This Company Be the Next Amazon?
Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
LinkedIn (NYSE: LNKD) is widely hailed as a star among the otherwise disappointing social media stocks. There are plenty of good reasons for that. The stock debuted in 2011 and registered an impressive 78 percent growth in 2012. LinkedIn listed its IPO at $45 and it is currently trading above $110, clearly surpassing the performance of other internet/social media stocks like Facebook (NASDAQ: FB) and Amazon (NASDAQ: AMZN). But the company is not without its dark spots. Like fellow social media companies, LinkedIn also seems to lack a clear business model. So far, the stock has proved its worth for investors, but will the ride continue into the future?
LinkedIn was considered to be somewhat liberally priced at its IPO and since then the stock has more than doubled, attracting the skeptics to argue whether the stock is likely to plateau, or worse, tumble down from its current highs. There are many indications that lend some credence to such skepticism. The stock is currently trading at Price Earnings ratio of 726, making it an expensive stock to own. However, LinkedIn is a new age growth company, whose value cannot be accurately determined using conventional metrics. The point in case is Amazon, which has historically traded at PE of about 3000 and has offered steady growth ever since. The web based company’s IPO price was set at $18 in 1997 and the stock is currently trading above $250. Be that as it may for Amazon, the high valuation of LinkedIn is still a cause of concern.
Another development that is attracting the attention of detractors is the sheer volume of insider selling taking place in recent times. Insiders including the company founder have been dumping stock as and when the opportunity arises. A massive amount of insider selling is a sure fire sign that the company lacks long term planning and roadmap. In last six months, the stock saw more than 2 million of its shares being offloaded by insiders, with no corresponding purchase.
LinkedIn stock is getting thrashed by analysts as well. Barclays downgraded the stock from Overweight to Equal Weight while Wedbush initiated its coverage with Neutral rating. A Barclays analyst expressed his concerns about the steep rise the stock saw in 2012 and the attractiveness of the stock at the current price point. Barclays also fears that the company’s 2013 guidance may not meet market expectations. In such case, the stock may see significant correction in its price.
However, I think LinkedIn is taking some steps in the right direction. Recently, it collaborated with Staples to launch a small business network called SUCCEED. This new deal will help LinkedIn in diversifying its portfolio and tap small and medium scale business market. LinkedIn derives about a quarter of its revenue from advertisements and is working to bolster it further. It introduced new API to further promote ads on its site.
Its Q3 revenue recorded over 80 percent growth on year-over-year basis and also surpassed the analysts’ estimates. Though, the current stock price seems to have already valued this rate of growth, but the consistent growth track record still goes in favor of LinkedIn. It also raised its full year guidance for current year, signaling top management’s confidence in the company performance.
LinkedIn is also registering good membership growth rate. The social networking site currently has over 187 million users. If we compare it to Facebook’s subscriber base, then the number may look paltry. But unlike Facebook, LinkedIn caters to a very restricted subsection of the society. However, its exclusivity also means that now it has lesser room for growth as well. In any case, the biggest catalyst for LinkedIn would be to increase its revenue per subscriber, rather than focusing on solely increasing the user base. Facebook IPO proved to be a big warning sign for people blindly subscribing to internet bubble. In contrast, LinkedIn stock is on the solid ground.
Overall, LinkedIn is one of the most solidly placed social media company and in the last one and half year, it provided growth for its investors. While, the stock is not expected to crumble down anytime soon, but it is going to take a lot to get it past $125 price barrier. Due to its expensive valuation, the stock is likely to remain range bound in the near future. In the long run, LinkedIn does have the potential to deliver good value despite its high valuations and become next Amazon, thanks to its solid business foundation.
StockRiters.com has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Facebook, and LinkedIn and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Amazon.com, 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!