LinkedIn (LNKD) currently trades with a PE ratio of over 850. That number itself has continued to leave the majority of investors with a negative opinion of shares of the social networking company. To many, the valuation is unsustainable.
On that end, I don't disagree. Such a figure signals overbought. Even the fact the company has beat clearly on six out of its seven earnings reports as a public company doesn't provide enough justification.
However, just because shares are currently overvalued doesn't mean they have to fall. The stock just needs a little more time to support such a valuation. In this regard, the company is well on its way.
Through LinkedIn's seven earnings reports, the company has reported a combined EPS of $1.16 compared to projected earnings of $0.55. In 2013, analysts are expecting full year earnings of $1.33. That would leave the current share price with a PE ratio of around 122. However, if the company is able to beat earnings by 25% over the next four quarters, or half of what they have beat by so far, the PE ratio then drops to around 98.
Now such projections do require the company to continue to beat earnings and beat earnings soundly, but recent reports have shown the company and its business model as being more than sustainable. Also, the 51% earnings growth expected this year already trumps that of other big and expensive names such as Apple (AAPL), Google (GOOG) and Priceline (PCLN) combined. It also handily beats the 40% earnings growth of the other social networking standout, Facebook (FB).
On top of that, LinkedIn enjoys something that very few companies do these days. That one thing being the lack of a significant competitor. For as popular as a company such as Google may be, there are many other search engines available. The same competitive balance can also affect other sector stalwarts such as Amazon (AMZN).
Also, for those who wish to dismiss LinkedIn via its hefty valuation, Amazon provides a glimpse that such buying can prove sustainable even without the support of sizable earnings. After posting a third quarter loss in 2012, bottom line estimates have Amazon posting losses for the first three quarters of this year. Yet, shares sit approximately $100 over that of LinkedIn.
After gaining approximately 25% over the last couple of weeks, now is not the best time to jump into LinkedIn's stock. However, after waiting for the increased buying to level off and a probable pullback, taking up a position in this stock may not prove as risky as the current fundamentals may lead you to believe.