Could it be that LinkedIn (LNKD) will emerge as the most successful, if not the best-known, social networking IPO?
Certainly, its rivals aren’t faring that well, as seen in a stock chart. True, Facebook (FB) has far more members – more than a billion compared to the 200 million or so that LinkedIn has acquired – but Facebook reported an underwhelming fourth-quarter result, announcing that while revenues rose, so did its costs.
And among the companies in the social networking space that have completed an IPO – ranging from China’s Renren Inc. (RENN) to online gaming firm Zynga (ZNGA) – LinkedIn’s performance has been a standout. Daily deals company, Groupon (GRPN), potentially viewed as a member of this group, has also fared dismally as a publicly-treaded company. LinkedIn stock has actually posted a healthy gain, and in spite of its lofty valuations, analysts still rate it as a “buy”.
Now its earnings – due out later today – need to deliver in order to support that stock price and enable it to continue growing. Any failure or shortfall is likely to be heavily punished, and regardless of how well the company does with this earnings release, that isn’t going to change any time soon. And while LinkedIn’s revenues have been growing at a steady and rapid clip, its earnings have been far more volatile – and Facebook’s experience reminds us of how a high-growth company can quickly become one offering more moderate upside potential.
At this point, there’s the chance of a big positive surprise on either earnings or revenue growth sparking a further upward move on the part of LinkedIn’s stock, but at least some of that may already have been factored into the company’s stock price gain of 11.6% so far this year.
The fact is that LinkedIn, while it may look like the ‘best of breed’ among social networking stocks today, is pricey – very pricey indeed. It trades at a whopping 15 times sales, and even its forward PE ratio is one of those figures that is so high as to be almost nonsensical and meaningless.
In other words, there are a lot of true believers in this stock – and a lot of high expectations in terms of what the company can deliver in the way of growth. LinkedIn doesn’t have some of Facebook’s downsides – there are fewer privacy concerns and while there is less buzz, that’s because the company’s members are driven by professional networking considerations, not because they want to post the pictures they snapped at last weekend’s boozefest. The demographic is a more affluent one, and LinkedIn may have more room for growth than some of its rivals. Moreover, it is beginning to invest more heavily in the idea of LinkedIn as a source of data for those hunting for skilled employees – a kind of premium recruiting platform.
But it all keeps coming back to the valuation, and here the arguments in favor of LinkedIn come to a screeching halt. Do you really want to hang around for a few years while waiting for earnings growth to simply catch up to the company’s share price, or would you rather identify another business where the growth isn’t yet reflected in the stock price? Odds are that you answered in favor of the latter alternative – even before considering the downside risk that goes along with investing in a high expectations stock like LinkedIn. This is another company that goes into the category of being a great business to use, but not one in which to invest at this point in time. Don’t be tempted by a big earnings win tomorrow; the odds are that a further jump in the share price will simply tempt more short sellers to starting circling the stock.
Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at firstname.lastname@example.org.
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