LinkedIn Corporation (LNKD) recently traded at astronomical price-to-earnings multiples between 900 and 1000. It is an amazing company which provides a social network for professionals to connect to one another. Unfortunately, the novelty of LinkedIn just doesn't justify its valuation multiples. When compared to its staffing industry peers, it is readily apparent that investors should stay away from LNKD shares at current price levels, even after considering growth projections.
Analyst Optimism for LinkedIn
An enthusiastic group of analysts working for Jefferies published a research report that projects how LinkedIn's earnings will be driven by more and more people posting their resumes on the website. Currently, over 170 million members have created profiles on LinkedIn, with almost 100 million members joining in the past two years.
LinkedIn makes a profit from this service by charging members fees for certain areas of its databases, and for the use of tools that will help employers find the best candidates for a specific job opening. This puts LinkedIn in the staffing market. LinkedIn also sells advertising on its website, which accounts for roughly one-third of its revenue. Jefferies analysts predicted LinkedIn's revenue will more than triple during the next few years, rising from the predicted $522 million in 2012, to almost $2 billion in 2014.
Computing Future Valuations from Growth Projections
Analyst enthusiasm is not sufficient cause for an investment. Instead, investors should be focused on growing the value of their assets. Stories, drama, the next big thing, and other distractions cannot justify paying one dollar for fifty cents.
Instead, investors should buy stocks trading at prices which make them good deals. A poor company trading at a dismal price may be an excellent trade. LNKD shares are trading at the other extreme: LinkedIn is a great company trading at incredibly enthusiastic valuations which should be avoided. Its metrics are provided with other firms related to staffing and employment:
Earnings Growth Est.
Sales Growth Est.
Automatic Data Processing
Future valuation multiples of LNKD and its peer stocks were modeled by combining expected growth and trailing valuation multiples. Graphs of future price-to-earnings and price-to-sales ratios based on analyst earnings growth estimates and historical sales growth follows:
The projected crossover dates for the P/E ratio span well into the future which demonstrate how LNKD shares are overpriced. Even assuming that long-term analyst growth rates will continue indefinitely (which is itself ridiculous), it would take eight years of sustained, phenomenal earnings growth for LinkedIn's current price-to-earnings ratio to be equivalent to that of the richly-valued Paychex or ADP.
These projections illustrate the absurdity of current valuations for LinkedIn. Analyst estimates for faster-than-economic growth are not predictive after three years or so, yet somehow investors are paying prices for LNKD shares which imply they can see the distant future. Investors are more likely overenthusiastic than psychic.
Estimated convergence years were calculated below for LNKD:
Automatic Data Processing
Investors should avoid LinkedIn at current prices. Instead, they should consider other companies on this list as more reasonable alternatives which can be justified without the absurdity of a eight years of sustained, phenomenal earnings growth. In particular, Manpower is trading at valuations which are attractive when contrasted with its more expensive peers. Better yet, its growth trajectory maintains its dominance over LinkedIn for years beyond the reliability of analyst projections both in terms of earnings and sales.
Please read the article disclaimer.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.