Don't Buy LinkedIn - Expectations Are Unreasonably High

May.20.11 | About: LinkedIn (LNKD)

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The Expectations for LinkedIn are Unreasonably High:
At $95, with normalized earnings in FY2010 of $0.0386, the P/E is 2,461.That implies that the company is going to grow the bottom line 100% a year for the next 8 years and then level off earnings --- and then you'd have a P/E of around 8. That is a fairly bold prediction. I can't say that I know of any company in history that has ever had expectations that high and has met them. Note that LinkedIn lost money in 2009, 2008, 2006, and 2005.

Crazy Bubble Mentality Exposed:
It's difficult finding people that will deny that a company with an annualized P/E of over 1000 that goes up 100% in a day is in a bubble. What most people fail to understand is the psychology of bubbles. Anyone who has studied bubbles knows that they go further than they ever should. The leading indicator that you are in a bubble is when people admit that the valuation is absurdly overvalued and yet they project that we will continue to see higher prices. For the most part, people rationalize it all by saying things like, "Well, it's gone up for a while now, I think it's going to go up a little more... I think I'll buy." Generally speaking, everyone knows that Linkedin is overvalued, but we all seem to believe that we are going to be able to find someone stupider than ourselves to sell it to at a higher price.

Time to Go Public
If I was Facebook, I'd be going public next week. The valuations that we are seeing these days are the best you'll ever get. I am going to say that we are seeing an IPO bubble much like what we saw in 2001 when we saw technology companies IPO at unreasonably high valuations. This time, the culprit is Social Networking.

Why I am Sad.
I can't find any way to profit from the fall in price. There are no options available. I can't find shares to short. The best I can do is warn everyone: Do Not Buy!

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in LNKD over the next 72 hours.