The market had its best five days since late last year last week. The S&P gained almost four percent and the other indexes had similar gains. Being a contrarian and given what is continuing to go on in Europe, I plan a new short after Monday morning's likely initial pop, after closing some short positions the previous week before the rally. It is LinkedIn (LNKD) which I have shorted successfully through options several times already this year. The company's growth is impressive but its valuation is stretched and it faces several headwinds:
Headwinds for Linkedin
- The disappointment over the poorly received IPO of Facebook (FB) should continue to produce negative sentiment for the social media space for the near term. Facebook was one of the few stocks that did not participate in the rally last week.
- Insiders continue to dump the shares. In recent filings, four insiders reported they sold almost another $20mm in shares.
- A recent data breach may be more serious than first reported and affected over 6mm accounts.
"LinkedIn Corporation operates an online professional network. The company, through its proprietary platform, allows members to create, manage, and share their professional identity online; build and engage with their professional networks; access shared knowledge and insights; and find business opportunities." (Business description from Yahoo Finance)
4 reasons LNKD is stretched on a valuation basis at $96 a share:
- It is selling at 79 times forward earnings. Facebook after its recent selloff is priced at 69 times forward earnings and the stock is still likely to go lower.
- LNKD is selling at just under 16 times revenues and that revenue growth is expected to slow substantially in FY2013 compared to FY2012 (Whose growth rate will be lower than FY2011).
- Obviously if the job market continues to be tepid, revenues and earnings estimates will be negatively impacted and sentiment on the stock could degrade.
- Consensus earnings estimates for FY2012 and FY2013 have stopped climbing, and the estimate for FY2013 has actually come a few pennies over the last month.