LinkedIn: 3 Reasons to Hit the Escape Button

Jun. 9.11 | About: LinkedIn (LNKD)

Ever since LinkedIn (LINKD) went public, we haven’t been able to escape the chatter. Opinions range from it being presented as the best thing since the invention of the wheel, to just another sign of the next tech bubble that may even bring about the apocalypse in 2012. Now we take a more moderate stance between the two extremes, but without a doubt, we believe investors should be hitting the “Escape” button on their keyboard for three reasons when reviewing this company.

  1. It’s Overvalued Even With a Broken Calculator: In our view LinkedIn is a viable business and does have the ability to generate cash, but we think the valuation is unjustifiable. We can’t think of any rational situation where it makes sense to pay for a firm that holds a P/E multiple of over 1000. If an investor was to pay roughly $78 for a share of LINKD and subsequently the firm paid out all its earnings to shareholders the return would be seven pennies. That is literally seven pennies you could probably find on the street. Further, we don’t know if that can even classify as a real return after the transaction cost. At this point we feel that LinkedIn has yet to demonstrate some breakthrough technology and or business model that can justify a higher trading premium than tech titans such as Apple (OTC:APPL), Amazon (NASDAQ:AMZN), or Google (NASDAQ:GOOG).
  2. Better Alternatives Around the Corner: Many people probably don’t realize this, but LinkedIn was founded in 2002 and has been around for almost 9 years. In the tech space that’s pretty old. This means that it literally took a nuclear economic recession around the world to make this company truly go viral over the web. A potential alternative to this firm at face value would be Groupon.com (NASDAQ:GRPN) in our view. Why? you ask. There are a couple reasons that come to mind pretty quick. First, the firm will be going public soon and is only 3 years old which is substantially younger than LinkedIn. The fact that the firm is this young company, has so much positive momentum already going for it, and is willing to go public makes us feel that the decision is one of wanting and not needing. Second, the service it offers provides instant gratification to consumers and has the potential for repeat business. Combine that with the fact that it also drives a substantially larger amount of unique visitors on a monthly basis than LinkedIn, and you can see why we feel it’s a strong alternative option. As a disclaimer we generally dislike using a tech bubble qualifier such as “unique visitors”, but in this region of the tech space, that still counts for something. Now if Groupon.com IPO’s with some 4 digit PE multiple valuation as well, you can be sure we’ll be saying to hit the escape key again. The “crème de la crème” tech startup still looks to be Facebook.com but we’ll pass on this topic for now. There is a lot rumor and speculation about the firm going public, but till hard information is released, we’ll table this topic for another time.
  3. The Short Sellers Are Salivating: When hedge funds and professional traders alike see a firm such as LinkedIn trading at an astronomical valuation, it’s like sharks smelling blood in the water. They want a piece of the action, they don’t play fair, and they are ready to rip apart whoever is on the other side of the trade. For all intensive purposes, LinkedIn as a stock may become a battleground between various hedge funds. The likely outcome of this will be extreme volatility.

Conclusion

We like LinkedIn for the service it provides, and as business, but we feel the firm is grossly overvalued. Alternative options to gain exposure in this part of the tech space (Web 2.0, social media, and beyond) are right around the corner and we feel no need to rush out to grab one of the first available names when it holds such a steep price tag.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.