Though their reliability has yet to be confirmed, there is little doubt in my mind that search engine analytics and website traffic statistics can assist in making accurate predictions for online service and retail companies. In a previous article I referenced search analytics, predicting that Michael Kors (KORS) would have strong holiday sales and that it would outperform other high end peers such as Coach (COH) and Tiffany & Co. (TIF). That article was published on Christmas Eve, and on the 25th of January Goldman Sachs was heard "pounding the table" for KORS (placed on its conviction buy list on the 11th of December) with a price target of $75/share. Year-to-date Michael Kors has seen its share price rise more than 10%. The company will announce earnings on the 12th of February before the market opens.
This time I'd like to take a moment to analyze LinkedIn (LNKD). Over the past year the stock is up over 60%, year-to-date the stock is up 7.52% and currently the stock trades just slightly more than 3% off the 52-week high.
Over the past year the stock has seen significant volatility with drastic moves from peaks to troughs and to peaks again.
|Date Range||Movement||Low Price||High Price||% Change|
|5/4/12 - 6/4/12||Peak to Trough||88.00||120.63||-27.0%|
|6/4/12 - 9/14/12||Trough to Peak||88.00||125.50||+42.6%|
|9/14/12 - 11/9/12||Peak to Trough||94.75||125.50||-24.5%|
|11/9/12 - 1/28/13||Trough to Peak||94.75||127.45||+34.5%|
If you are believer in psychological price levels, often called support and resistance levels by technicians, then you might already be wary about LinkedIn's future. For those who need more concrete evidence, website analytics and search analytics paint a similar negative picture.
While Google Trends shows searches for LinkedIn still reaching all-time highs, a look at the internals shows a bleaker picture. The site has seen a significant increase in bounce percentage, which represents the percentage of visitors who view only one page and then leave. Over the past three months the site's bounce percentage has increased approximately 3% to 27.9%.
For those users that aren't "bouncing" off the site, the total number of pageviews per user has decreased 3.04% to 8.6 pageviews per user over the most recent 3 months. Coinciding with this decrease is the site's ability to keep eyes on the site with the average user spending 7:22 minutes on the site, a decrease of 2% during the same time period. This is quite contrary to Facebook (FB) which has seen an 8% increase in the time users spend on the site (28:05 minutes) and an 8.78% increase in the number of pageviews per user (18.09) over the last three months. While it isn't necessarily fair to compare the personal social networking titan to the professional networking titan, the fact remains that advertising dollars will flow to where users spend their time.
Fundamentally, the stock looks overvalued as well. LinkedIn trades with a price-to-earnings ratio of 823, which is 2.9 times the multiple of Facebook. Forward earnings multiples mimic the same story as LinkedIn looks steeply overvalued with a forward P/E ratio of 94.24 versus 47.33. Even adjusting for LinkedIn's faster growth rate, the company's PEG remains at a lofty 13.5 against 9.6 for Facebook (also quite lofty). It seems that no matter how you slice it, whether you're looking at earnings growth or cash flows, there is no reasonable justification for LinkedIn's current valuation.
To further support this thesis that shares of LinkedIn may be seen as overvalued by the market, one need only visit Trefis, where users can create their own forecasts for share value. Users have the ability to adjust growth forecasts from various divisions that a company may generate revenues. The community average share value for the top 98 models comes in at $69.30/share with a standard deviation for the estimates of $23.44. Based on these statistics, there is a significant statistical difference between the current market price and market estimates. This negative bias leads me to believe that, combined with search and web traffic analytics, the upcoming earnings announcement will leave investors disappointed and will ultimately lead to the decline in share value.
Additional disclosure: Based on my own research I will be initiating a short position in LNKD, prior to the earnings report, by purchasing put options.