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Linkedin: It’s Cool But too Expensive

 November 01, 2012 10:34 AM

(By Kevin Donovan) Make no mistake, LinkedIn is a pretty groovy way to build professional bridges, but we think current lofty valuations make it a bridge too far for investors. In our view, current shareholders should take advantage of any pop in price following the release of quarterly results today to take profits.

Investors in LinkedIn (LNKD) have tied their wagon to galloping revenue growth, but the law of large numbers tells us that growth rates are bound to slow and that valuation will come down to earth. In the last year revenue has jumped about 115 percent, compared with 88 percent for Facebook (FB) and 29 percent for Google (GOOG). On a forward price-to-earnings basis, LinkedIn sports a multiple of 88 versus 33 for Facebook and 15 for Google.

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To be sure, price-to-sales comparisons are more reasonable, but still on the high side. LinkedIn's ratio is 15, compared with 10 for Facebook and 4.68 for Google.

Year-to-date, the shares are up almost 70 percent, slumping 12 percent in the past month, compared with a 5 percent decline for the internet software and services sector.

Meanwhile, the company will report third-quarter results after the close today. On average, the Street expects a 75 percent year-over-year increase in revenue to $244 million with estimates ranging from $239 million to $251 million.  Earnings per share are pegged at $0.11 versus $0.06 in the year-ago period.

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Avoiding the stock at current levels begs the question of an opportune entry point. Using a forward PE of 70 – more than half way between the current forward PE and that of Facebook – we derive a share price of about $85. That would put the stock at levels seen last spring. The shares closed yesterday at $106.93. The price chart below shows a support level at about $95.

Source: Finviz.com

LinkedIn has about 90 million members in its professional network. Its platform lets members create, manage and share their professional identity online, build and engage with their professional network, access shared information, and find business opportunities. The service provides applications and tools to search, connect and communicate with business contacts, learn about career opportunities, join industry groups, research organizations and share information.

Members create profiles that serve as their professional profiles and are accessible by any other member, as well as anyone with an Internet connection.



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