We’ve Seen This LinkedIn Movie Before

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

Not surprisingly LinkedIn reported numbers this past quarter that had investors -- almost exclusively individual investors as the company is only 23% institution owned -- cheering. Q4 revenues of $167.7 million is nothing to sneeze at and handily beat analyst estimates. The result? The stock continues to trade at ridiculous multiples, just as it did yesterday and too many days before.

Proponents will say they’re betting on future growth, and that’s what you do with young companies breaking new ground. True. But how far out are investors looking? The 715 times earnings LinkedIn (NYSE: LNKD) currently trades at is ridiculous and has no basis in reality. So, we’re trading on future earnings, right?

Based on guidance from company management today the company is valued at nearly 80 times 2012 year-end numbers. Some are blaming this kind of silly valuation on the pending Facebook IPO. The connection being that with all the hullabaloo any and all internet stocks, particularly those relating to social networking, are riding the wave. While it would be nice if that weren’t the case – in other words investors were actually relying on fundamentals – it is, plain and simple.

The scary part is that for some time investors will continue to flaunt their gains saying “neener, neener” to all the folks that look at LinkedIn and shake their heads, like institutional investors. And they’ll have the returns to back it up – for a while. We’ve seen this movie before – a hot new(er) company with a unique model blows the doors off the market. The reason is simple – it’s a company that investors use, know and understand. Institutional investors have shied away, other than racking up ridiculously high short positions for that very reason. They, too, have seen this flick.

Look to Netflix for a peek into the future. Verizon and Coinstar’s recent announcement of a partnership to take on Netflix is exactly what will happen to LinkedIn. And the Verizon and Coinstar marriage is in addition to Amazon, Google and others who already decided to enter the fray. Competition will come and there are several likely candidates.

Speaking of Google (NASDAQ: GOOG), they and the soon-to-be-public Facebook are just two behemoths that could and probably will join the business networking party. Even companies like AOL (NYSE: AOL), as they make their shift away from an internet access service to a destination portal, could find their way onto this playing field.

According to a recent LinkedIn press release the company now boasts 150 million users around the world. Not bad. Google’s new social network Google+ is at 90 million users and they got there basically overnight. Yes, that is a pure social network as opposed to LNKD’s business networking, but the point is they can get there, and get there fast if they so decide.

Enjoy it and please keep the “neener, neeners” to a minimum. And while individual investors pad their capital gains in the near-term, the institutional folk will keep upping their LinkedIn short positions.


The investment opinions included are just that, opinions. Investing involves risk, as you well know, so consider your decisions wisely. Tim holds no position in the securities mentioned in this article.

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