LinkedIn: Just Say No

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

For proponents of fundamental investing, buying shares of LinkedIn (NYSE: LNKD), the leading online business networking firm, is akin to investing in Arabian horse farms or Florida orange groves. They may sound good on paper, but is there anything tangible there? After a successful IPO earlier this year that saw the stock rise to as much as $122 a share, LinkedIn has settled into a trading range of about $60 to $70 the last month or so. But why even $60 or $70?

For a company that’s trading at over 60 times 2013 projected earnings, investors are taking unwarranted risks with LinkedIn. Does no one remember the dot bomb’s of the 90’s? Sure there were a few companies that came out the other side, eventually, but there were a lot more duds than winners. It took Amazon a decade to warrant its stock price; most others never did.

Proponents point to LNKD’s leadership position and relative lack of competition as reasons for the ridiculously high valuations. The stars will need to align, and stay aligned for at least two years for LinkedIn to warrant this kind of price, and that’s too long for investors to wait and hope. As of today the stock is trading somewhere around 1,200 times earnings; ouch.

As for the competition, how long before others start wading into the LinkedIn pool? Industry giants like Facebook, Google (NASDAQ: GOOG) and Microsoft (NASDAQ: MSFT) aren’t going to stay on the sidelines long. And when the big boys get in the game, one of the few positives LinkedIn investors point to will be eroded. Even a Monster Worldwide (NYSE: MWW) is cheaper, has more upside and actually has a track record for investors to analyze and review.  

Now, it’s quite possible LinkedIn will have another run up toward the $80’s, at least a number of analysts think so. But that growth, should it come to pass, will be as empty as the day the IPO stock more than doubled. If you’re thinking about LNKD, keep a close eye on it and be prepared to get out in a hurry. Eventually, shareholders are going to demand returns to warrant the stock price, and LinkedIn is a long way from being able to provide any.

To the company’s credit, it is at least profitable and revenues have continued to grow. Unfortunately, expenses have increased along with the revenue, offsetting much of the gains.

This stock reminds me of the compulsive gambler who’s all to willing to share the story about the recent jackpot he won. Of course, he can never remember how much money he threw away before he hit the big winner. LinkedIn is one gamble investors would be better off avoiding.

The investment opinions included are just that, opinions. Tim is not a licensed investment professional, nor has he been for several years. Investing involves risk, as you well know, so consider your decisions wisely.

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