Over the weekend a team of runners running for LinkedIn (LNKD) broke their own course record for the 12k Centipede race at the Zazzle Bay to Breakers event. As you can see below, a centipede is when 13 runners are tied together with a cord and must run together. The LinkedIn team broke its own world record from the same 2011 event. Keep in mind that LinkedIn simply hires runners for the race. The competitors are not employees of the company.
More importantly, LinkedIn's business and stock is one of the most impressive in the social networking industry. In fact, since the world record was broken, LinkedIn's stock has surged roughly 7.5% while the Dow Jones (DIA) is flat. Other social stocks such as Facebook (FB), Zynga (ZNGA) and Pandora (P) are down 12%, up 1.5%, and up 3.7%, respectively, since Sunday.
LinkedIn's business is similar to the other companies because ads are important, but as career and job markets become Internet based then LinkedIn's services will become more useful. For instance, many companies offer applicants the opportunity to simply upload their LinkedIn data to the application in order to save time.
In fact, LinkedIn is what Facebook was to Myspace years ago. Originally Facebook was developed for college students and/or alumni as a way to interact in a more sophisticated manner. And at the time this was something millions of people wanted because Myspace was turning into a immature social site with all kinds of offensive profiles. Now, however, Facebook has evolved into what Myspace once was. A place for anybody of any age to blog about their life problems and upload offensive photos just as with Myspace.
Another way to think of this is that the original Myspace generation moved on to Facebook as they grew older and will eventually move on to LinkedIn. However, this does not mean a LinkedIn bubble will exist similar to what happened to Myspace and what I am anticipating will happen to Facebook in the coming years.
More specifically, LinkedIn was created for professionals to interact with professionals. Individuals looking to promote their own business or contact a business will use LinkedIn's services. Therefore LinkedIn's recent pullback presents investors with a buying opportunity.
Prior to the systematic weakness in equities, LinkedIn's stock rallied from its 55.98 low all the way to a high of 120.63. Currently the stock sits just under 20% from this level. And 15%-20% is a nice profit for a 6-12 week investment.
With that said, LinkedIn is not a guaranteed money maker. The stock has a 694 P/E ratio; which indicates that the share price is vastly overpricing the current valuation of the company. However this also indicates investors and traders have high expectations for LinkedIn. In the perfect world, LinkedIn's share price will increase at a rate slower than earnings and the P/E ratio will gradually decrease. Unfortunately we do not live in a perfect world. To be honest, in a perfect world a P/E ratio of 600 would never exist, but that is beside the point.
What is important is that any cash flow, income, margin or revenue weakness will trigger a massive sell-off. I do not anticipate LinkedIn to suffer any of these weaknesses, but the possibility is out there. Another issue with LinkedIn is outside problems that do not directly impact the stock or business operations. For instance, as global fears continue to grip U.S. investors, we will be hard pressed to see a rally continue to push equity prices to new highs. In fact, as global problems arise LinkedIn's services will be more valuable for the unemployed.
LinkedIn may not need a market rally to reach new highs, but it will be difficult for the stock to move without the market. Especially because the major reason LinkedIn has rallied is simply based on anticipation of incredible future growth.
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(Source:StockCharts.com)
In the end, however, LinkedIn's stock is a definite buy on this pullback. The low was back in the 92 region, but there is still plenty of room left in the tank. The relative strength index is at a middle point, which indicates the short term rally is underway, but you can still grab the caboose before the train leaves the station. Also, the stock came within 1% of completing a 50% retracement; which indicates that the slide is over.
I would be surprised to see a new 52 week high within the next 4-8 weeks, but I am expecting to see some resistance around the 110 region followed by a move after that. The 110 region caused a minor slowdown in the stock's previous rally and provided minor defense on the way down.
It is difficult to gauge the resistance points of LinkedIn because the stock's volatility raises the probability of large swings in the share price. Therefore resistance points can be broken in a matter of seconds. But what is for certain is that LinkedIn is committed to promoting the business by setting world records, and the stock is in the buy range. LinkedIn will not be a buy for long, therefore I want to warn investors and traders to avoid jumping on the ship if the share price moves another 3-5% higher. The stock can definitely head lower on negative global news and in this case you will be able to pick the stock up between 90-95.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in LNKD over the next 72 hours.
