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Is LinkedIn (NYSE:LNKD) part of the next tech bubble? Our response: “Does it really matter?” After all, no one forces anyone to invest in highly speculative tech companies. LinkedIn continues to whirl around in this debate not only because it was one of the first Internet startups to IPO, but also because it was extremely successful. While a good number of investors remain wary of the firm, we think LinkedIn may actually be an “Internet god” among the pack of Internet companies going public and deserves a serious look.

We’re not going to tell you that we were super-bullish on LinkedIn from day one when it was private or when it finally became public. It was actually a pretty crummy site initially and we saw little value in what it offered from both user and investor perspectives. My, how the times have changed. Dare we say it? We’re actually now bullish on LinkedIn - primarily because the firm seems to have turned a corner. We’re unsure if management is deliberately leveraging the situation, but regardless, this has changed our position and we rate LinkedIn a buy because the firm is making a profit, diversifying its revenue streams, and starting to pivot into a new phase.

We Know What Happens When You Assume

Currently, most people are pegging LinkedIn as some type of social Internet phenomenon based on professional networking. But that’s “so yesterday” in many respects. For example, LinkedIn is the second-largest referral traffic provider (behind only Twitter) for TechCrunch.com. Now what does that mean? It means LinkedIn is a site for far more than just networking.

To assume LinkedIn will always be solely some type of professional networking site is a huge mistake. That site, in our view, is actually a lead capture platform that targets a broad demographic of professions. Now that the firm has captured all these “leads,” the site is testing different ideas to monetize them. Can they monetize, in some form, news aggregation? The answer for that is “yes” and they probably already are.

We have little doubt that LinkedIn can deliver extremely targeted ads for certain topics, given that they have a user’s work history, travel preferences, skill sets, and other information. Let’s also remember that - solely based on what many consider a “wishy-washy” platform - LinkedIn has actually been able to achieve sustainable profitability. One can only imagine what happens when they substantially improve the platform and leverage it.

Profitability Trends TTM
Gross Margin 81.76%
Operating Margin 6.04%
EBT Margin 6.10%
Free Cash Flow/Sales % 3.46%

To assume that the concerns of analysts and the investment community have fallen on deaf ears would be short sighted. Management is fully aware that it must increase top- and bottom-line numbers to justify its price/multiple valuations. Given that the firm has bought time by not bleeding cash, it’s trying to ensure it really comes up with top-dollar ideas and not ideas that produce pennies. The recently flurry of activity in adding new features looks like the groundwork for better monetization. As well, an often overlooked fact is that the firm has sound liquidity with a quick ratio of 1.36 and a current ratio of 1.53.

Critical Mass Has Been Achieved

In our view, LinkedIn hit critical mass by achieving profitability. That may not seem like much at first, but so many other technology startups with “great ideas” and social-user traction fail to even grasp the idea of profitability. LinkedIn’s profitability may not be amazing, but it is far better compared to other Internet companies. Given time and continued momentum, it will become more profitable as it refines its ability to monetize its platform. Remember, investors looking at LinkedIn today shouldn’t be buying today’s profit today. The attraction is the potential for the firm tomorrow. Amazon.com (NASDAQ:AMZN) is a spectacular case study of this phenomenon.

Call To Action:

We realize that opinions of LinkedIn vary widely, to say the least. We rate the firm a buy because of its current profitability and its strong potential for growth. Those who disagree should remember that firms like this are often extremely fluid and change their dynamics quickly to increase profitability.

Today, LinkedIn is primarily for professional networking, but that doesn’t mean it will be the same a year or two from now. Perhaps the best example of this is Facebook – which, at one point, was rejected by VCs on the East Coast before becoming one of the largest private companies in the world. There are two sides to every trade. For now, we stand alongside LinkedIn.

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

Source: LinkedIn: A Buy Thanks to Current Profitability and Strong Potential for Growth