LinkedIn (NYSE:LNKD) is an amazing website for job seekers, networkers, and business clients worldwide. But is the stock? At today’s valuation it’s hard to justify the metrics on fundamentals alone. The company reported revenues in the second quarter of $121 million and net income of nearly $4 million, and has guided next quarter’s revenue’s to be $123 million. These numbers show excellent year over year growth, with nearly 70% of revenues coming from recruiting and the remaining 30% from online advertising.
In the previous year, the company reported revenues of $244 million. So far in 2011, the company has accumulated revenues of $214 million. Revenues have been going parabolic and should more than double this year. Net income is estimated at 0.01 for FY11 and 0.38 for 2012, which spells good growth. LinkedIn has also generated over 115 million users on the site, an increase of 61%. Its page views topped 7 billion, an 80% increase. The company is hitting on each fundamental metric, so is there a problem?
Yes. The company has 96 million shares outstanding, of which ONLY 5 million are traded in the open market. That leaves the investing public with only 5% of possible shares (this is a company still owned and controlled by insiders). To put this into context, there are many similar companies by market cap trading over 100 million shares. A small float usually works well for longs, as shorts can get squeezed very easily.
This brings us to the next question: How many shares are short? 2.5 million! Again, a good reason the stock has been trading in a range from the low $60s to $120 in mere months is the extreme lack of liquidity, and a good reason is that the stock remains overvalued.
Going back a few months, we can remember that LinkedIn was priced around 40 the day before its IPO, and then was raised to the actual IPO price of 45. The first day of trading, it opened at 80 and traded all the way to 120. It was a wake-up call to the IPO market and started a slew of other names like Pandora (NYSE:P), Zillow (NASDAQ:Z), and soon to be public Zynga (ZYNG) and Groupon (NASDAQ:GRPN).
The main reason for this drastic move was its lack of liquidity. There are many fund managers eager to own a transformational social media company, and it causes a rise based on supply and demand. At some point, I expect the stock to trade at a better valuation and will look to add shares. Right now it’s valued too rich for my liking.
Looking at valuation metrics, the stock is almost certainly overvalued. The forward P/E is around 200 times next year’s earnings. Yes, the company is growing fast and I expect it to continue to do so for the next several years, but the stock is banking on exponential growth. I’m an avid LinkedIn user and believe that it’s a great site for businesses and users alike. Even its major competitor, Monster Worldwide (NYSE:MWW), has been on a crash course to lower lows. Year to date it’s down around 70%, and LinkedIn is a good reason why.
With a $7.5 billion dollar valuation, LinkedIn is expensive. No one can argue that (although I’m sure people will). I can try to summarize the long's thinking. They probably believe that the company will make 1.5 down the line, and it probably will. But how many years will it take to get there: 2,3,4,5? So what do people do when watching a company they love, but a stock they are afraid of? I’d look to the options market.
Find a price you would be willing to buy the stock at. It might be $60, $50, etc. And sell puts. If the stock doesn’t reach your strike price, you collect the premium. If the stocks goes below you price, you will need to buy those shares at the strike price. This is a strategy much safer than trying to time the stock’s 60 point swings. It’s better to have a solid fundamental plan than to try to play this casino.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.