Seeking Alpha
Long/short equity, contrarian, special situations, wild cards
Profile| Send Message| ()  

LinkedIn (LNKD) reports later on this week, after the bell on Thursday, August 1st. It's likely the "social media" companies will already have trading momentum going into Thursday, as Yelp (YELP) also reports this week, on Wednesday. Analyst consensus for LinkedIn is .31/share on revenue of $354 million.

LinkedIn has been a great vehicle for investors over the last year, with those going long yielding 100% over the last year, 79.7% year to date, and 9.5% over the last three months alone.

My personal history with LinkedIn? Admittedly, has not been great. I shorted LinkedIn when it was trading at around $150, got burned, but I'm back for more - not because it's personal with me, but because I still believe this 22 billion dollar resume site to be overvalued as part of the social media bubble. I have since covered and am thinking short's the way to go with LinkedIn heading into earnings. Here's my three main reasons I'm bearish on LinkedIn before earnings.


(Click to enlarge)

1. Fundamentals Are Off the Charts

LinkedIn is currently trading with a market cap of 22.73B and a P/E ratio around 600. Anyway you mix and match this, the company is extremely overvalued. The company is trading near, or at, all-time highs. The rate at which is company is going to have to grow to support a P/E of 600 is going to have to be breakneck - anything short of a major earnings beat is going to pull the company's stock back on Thursday.

The company's chart shows that for the better part of 2013, the RSI has been bouncing up against overbought several times, leading this investor to believe that the company is pushing the higher end of its (already) astronomical valuation.

Respected SA Contributor Valuentum echoes these sentiments in their recent article:

Our discounted cash flow model indicates that LinkedIn's shares are worth between $45.00 - $134.00 each. The margin of safety around our fair value estimate is driven by the firm's VERY HIGH ValueRisk™ rating, which is derived from the historical volatility of key valuation drivers. The estimated fair value of $89 per share represents a price-to-earnings (P/E) ratio of about 217.8 times last year's earnings and an implied EV/EBITDA multiple of about 68 times last year's EBITDA.

Just like Angie's List (ANGI) that I wrote about just days ago, I think it's only a matter of time before the psychotic price to earnings valuation snaps back to reality for LinkedIn.

2. Susceptible to Major Market Correction

Recession proof stocks are tough to find. I recently argued Johnson & Johnson's (JNJ) case as being one of the only recession proof stocks I've come across in a while. LinkedIn, a social media networking site, is anything but recession proof.

A couple of the usual sites I've gone to in order to try and find LNKD's Beta haven't listed one - so, in lieu of that - here's how LinkedIn has performed over the past 3 years since its IPO versus the major market averages:


(Click to enlarge)

Which does a fine enough job in trying to get across another point, that piggybacks off of my original point: if this market crashes, despite LinkedIn's performance as a company, the stock could be in for a rude awakening. This rally of late (at the risk of beating a dead horse) has been extremely speculative and based on a super aggressive growth model for the company. A major market pullback that can effect things from psychology of investors down to prices of necessary items in LinkedIn's supply chain put this company at risk.

3. LinkedIn is Going to Face Serious Competition At Some Point

Same argument as I made months ago, still holds water, in my opinion.

Again, I'll cite LinkedIn's 10-K filing:

We expect to face increasing competition in the market for online professional networks from social networking sites and Internet search companies, among others, as well as continued competition for customers of our hiring and marketing solutions.

We face significant competition in all aspects of our business, and we expect such competition to increase, particularly in the market for online professional networks.

Our industry is evolving rapidly and is becoming increasingly competitive. Larger and more established companies may focus on our market and could directly compete with us. Smaller companies, including application developers, could also launch new products and services that compete with us and that could gain market acceptance quickly. We also expect our existing competitors in the markets for hiring and marketing solutions to continue to focus on these areas. A number of these companies may have greater resources than us, which may enable them to compete more effectively. Additionally, users of social networks may choose to use, or increase their use of, those networks for professional purposes, which may result in those users decreasing or eliminating their use of LinkedIn.

Companies that currently focus on social networking could also expand their focus to professionals. We and other companies have historically established alliances and relationships with some of these companies to allow broader exposure to users and access to data on the Internet. We may also, in the future, establish alliances or relationships with other competitors or potential competitors. To the extent companies terminate such relationships and establish alliances and relationships with others, our business could be harmed. Specifically, we compete for members, enterprises and professional organizations as discussed below.

LinkedIn doesn't really carry with it anything proprietary, and in the world of social media and websites, cloning ideas, improving on them, then launching them as your own has become commonplace. We went from Friendster to Myspace, before we finally got to Facebook (FB). We went from Napster to Kazaa to Limewire, before we finally got the iTunes store.

The overlay with website ideas is actually quite apparent if you take the time to look. Sales has Amazon (AMZN), Overstock (OSTK), and eBay (EBAY). Travel has Travelocity, TripAdvisor (TRIP), Expedia, Kayak and Priceline (PLCN). Review sites are now everything from Google (GOOG) to Yelp to Angie's List . Aside from the already founded "job networking" sites like Yahoo's Monster.com (YHOO), LinkedIn is absolutely going to be faced with new competition over the coming years, if not months.

QTR's Analysis

I'm seriously considering a short position heading into earnings for LinkedIn. I might take something long-term in an equity short of the stock, as well as adding some options that expire towards the end of the year - as I still contend that the market as a whole is due for a correction.

Although, again, it's worth noting that stocks like this one, Netflix (NFLX) and Yelp have all moved up without rhyme or reason right before my eyes before. So, remember, with volatile stocks comes action without reason sometimes, and that can be a risk.

For me, a $22 billion dollar market cap for a job networking website? I'm not buying it.

Best of luck to all investors.

Source: 3 Simple Bearish Points For LinkedIn Into Earnings