I've been hearing a lot of people comparing LinkedIn (LNKD) stock to the dot-com bubble back in 1999 and 2000. So, I wanted to compare some numbers from back then to now. I chose Amazon (AMZN), because it has similar quarterly revenue numbers and growth. Here is a timeline of events that show very strong revenue growth for Amazon, but the large growth doesn't prevent the huge drop in the stock price.
October 20, 1999: Amazon is approaching $95 per share. D.O., a reader of Boca Raton News, writes in to complain to a stock columnist, Malcolm Berko, for bashing Amazon stock. D.O. claims that Amazon will have 50 percent revenue and earnings growth year over year for the next 10 years, calling it "a blockbuster". Berko responds with an outline of why he thinks Amazon will keep gaining more revenue, but that the stock is far overpriced.
November 15, 1999: AMZN reports its 3rd quarter results. Revenue is up to $355 Million from $153 Million from the same quarter in 1998, which represents a mind-blowing 131% increase. Christmas is coming for some AMZN stock holders, but they'd better sell their shares soon!
Dec 6, 1999 (week of): AMZN hits an all-time high of $113, which it will not reach again until 10 years later in October of 2009. The market cap is over $37 Billion. Skipping ahead a few months to the annual report, we find out that this is a P/S ratio of over 22.5 on revenue of $1.64 billion.
Dec 27, 1999: The stock price continues to drop as Jeff Bezos is named Time's Person of the Year, among rumors of pending layoffs. The rumors are confirmed! They claim that they are simply eliminating underperforming workers.
Jan 28, 2000: Amazon lays off 150 workers, which represents only 2% of its work force. The stock price is down to $61.69 just two months after its all-time high, which represents a drop of 42%. While AMZN is testing out a new floor, the NASDAQ composite is testing out a new roof, surpassing 5,000 before a tumbling a few weeks later.
March 23, 2001: Amazon reports net sales of $2.76 Billion for the year ending Dec. 31, 2000, a year over year increase of over 68%.
April 6, 2001: AMZN drops down to $8.37 per share. Just 1 year and 4 months after its all-time high of $113. This represents a drop of over 92.5%, and the stock still has not reached its low. (It drops under $6 after 9/11). The stock price would have to increase 1,350% from $8.37 to get back to where it had been just 16 months earlier. With a market cap of just under $3 Billion, this gives us a P/S ratio of 1.06 based on the March 23 report.
Jan 4, 2013: Jeff Weiner is named 2012 Executive of the Year by Silicon Valley Business Journal. He is referred to as "The New King of Social Media" on the cover.
Feb 7, 20013: LNKD reports 81% in YoY revenue growth for its 4th quarter, going from $168M in 2011 to $304M in 2012, with revenue of $0.97 Billion for the entire 2012 year.
Feb 10, 2013: Seekingalpha users give predictions of 40%+ compounded YoY growth for the next 3+ years in response to an article suggesting that LNKD is a "sure fire short".
Feb 20, 2013: LNKD reaches an all-time high of $165.20 before dropping to its closing price of $158.09 at the end of the day. The P/S ratio goes over 18.2, which is only 4.3 points shy of the 22.5 peak for Amazon in 1999.
Using AMZN as a guideline, where could LNKD go after February 20?
If we haven't hit the ceiling yet, then can we hit the high numbers of AMZN? If the P/S hits the 22.5 mark before future earnings releases, then we'll have a stock price of $204 for a 29% increase from February 20's closing price.
On the other hand, if we are already at the peak, then a stock price drop similar to Amazon's would bring the price down to $95.82 per share by the middle of April, and down to $12.39 per share in June 2014.
|1Q||$165.20? / $204?||$111?|
Even if revenue were to grow to $3 Billion over the next 16 months, the 1.06 P/S ratio would give us a stock price of only $29.63.
The revenue numbers are evidence that LinkedIn is in a bubble. Is LNKD going to lay off some underperforming workers soon? Probably not, but we don't know for sure, and there could be another catalyst instead to cause the bubble to burst. I don't know when the bubble will burst or how it will burst, but Amazon shows us one way that it could occur!
Disclosure: I am short LNKD.