Facebook Vs. LinkedIn: Comparison And Fundamentals Show LinkedIn Is Overvalued

In a recent Forbes article, contributor Daniel Fisher suggests that LinkedIn (LNKD) is a more "clever" way to play the social networking craze than Facebook (FB). The argument hinges on the supposed superiority of Linkedin's business model -- the company generates most of its revenue by charging employers to search LinkedIn member profiles for prospective hires. Fisher asserts that this more "conventional" way of doing things is a far more predictable revenue generator than selling advertisements and, as such, will ultimately prove to be a more reliable generator of free cash flow. There are multiple problems with this idea.

First, Fisher bases the argument on the fact that LinkedIn generated free cash flow of $41 million in the first quarter of 2012 while Facebook's free cash flow was negative $50 million for the same period. What he doesn't mention is that LinkedIn's trailing twelve month (TTM) free cash flow was around $75 million (according to YCharts and Yahoo Finance) while Facebook had TTM free cash flow of $470 million. Additionally, Fisher notes that

A stock is only worth the cash its owners can reasonably expect to claim in the future, and the more reliable that stream of cash proves to be, the more valuable the stock

This may be true, and while there is no way to tell what the future holds regarding how effective a revenue-generator Facebook's ad business will be, what is known is that Facebook had nearly $4 billion in cash at the end of 2011 and will be sitting on roughly $10.3 billion after its IPO. Given this, it certainly appears as though Facebook will have some time to figure out how to monetize its 901 million members before it is forced to break open its employees' piggy banks and count loose change.

The idea that LinkedIn's business model is a more reliable revenue generator seems spurious as well. Technically it depends on how you define "reliable," but if we are talking about total revenue generated, there simply is no comparison: Facebook generated $3.7 billion last year to LinkedIn's $522 million. If you define the success of a business model in terms of profitability (which seems like the only real way to define success), the comparison is downright embarrassing: Facebook's 2011 net profit was $1 billion while LinkedIn managed a meager $12 million (Facebook made 83 times as much money). Mr. Fisher acknowledges these rather unflattering comparisons in his article. I could go on, but I think the point is made: no matter how uncertain the future of Facebook's business model, as of now, there is simply no comparison between LinkedIn and Facebook. Keeping that in mind, investors should consider the fact that Facebook's IPO price was $38 dollars -- about a third of LinkedIn's share price. Why should LinkedIn trade at any premium to Facebook at all? Based on the numbers, there is no reason whatsoever to pay two or three times Facebook's price for LinkedIn shares.

Leaving the Facebook comparisons aside and going back to fundamentals, LinkedIn trades for around 170 times forward earnings. Looking into 2013, the number doesn't look much more reasonable: LinkedIn trades for 90 times 2013 earnings estimates. If the rationale for this ridiculous price is "growth potential," investors need to find another excuse: LinkedIn's net income fell 22% from 2010 to 2011. Additionally, costs are rising -- fast. LinkedIn's sales and marketing expenses soared 200% in 2011 while its product development costs jumped 100%. Costs then, are rising faster than revenue (net revenue rose 100% last year). All of these figures can be found in LinkedIn's 2011 annual report.

Investors should of course, keep in mind that the fact that LinkedIn is far too expensive doesn't mean Facebook is fairly valued at half of LinkedIn's price. All social media stocks look expensive right now. The point is that LinkedIn seems to be the most overvalued of the group. Short LinkedIn or Long LinkedIn puts.

Disclosure: Long LNKD puts

Comments

[David Atherton]

The other thing I forgot to say is - what a terrible time to IPO, beginning of summer and all this Greece trouble. If they had IPO'ed in Feb, who knows what would have happened.

[Twest]

It is up to all of us to read for facts and not just for opinion. It would be logical to collect "opinion" from each person before reading an article and also after to see if opinions changed. It would also be nice for readers to say if they had a position in a market and then whether the article made the user want to increase or decrease that position, based on the information presented. Note I didn't say "facts" presented, but "information". We are all thankful for seekingalpha and want to continue to see it improve.

[Jim282]

Facebook should just charge like 1.00/mth or 9.95/yr.

That brings in 700M - 1B dollars a month.

Problem Solved.

[vladkri]

It never works going from "free" to "not free" even if it's $1. In our minds there is a huge hardwired difference between "cheap" and "free". We all are much more comfortable going from "inexpensive" to "more expensive" than from "free" to "paid" even if difference is $1 in both cases. For example, we all (well, those who've been around) are comfortable that a newspaper costs money. Either you pay subscription or drop a coin into machine on Saturday morning. For that reason news Web sites might have some success charging us to see news. But all stuff that was free previously stands very little chance to monetize on subscriptions. So about comparing apples and oranges, in fact both stocks are very similar if not identical.Their sole purpose is to allow first-hand guys to cash out. There is no intention of returning money to investors through a product that will turn up profits. It's just FB is unlucky that Wall Street ran out of stimulus money at the moment. Cheers.

[Raghunand]

Saying LNKD share price at around $100 is 3 times more expensive than FB at $38 is absolutely ludicrous...the editors must do a better job of screening articles before allowing them to be posted on a site like Seekingalpha...will help weed out the amateurs from the pros

[RODESSA]

LNKD is really overvalued and in a bubble, CHACHISUPREM and SINGHHJ58 don't want to recognize the metrics of the author, but when GOOG has a P/E of less than 18, FB a P/E of 60 (2012) and LNKD of more than 170(2012).With an EPS of 0.04 for the Q1 according to the fiilling to the SEC, so 0.16 yearly, it represented at $120.62 a x 754 yearly EPS!!!
If you read the 42 risks factors filled to the SEC for it's IPO, and you have a look to very fast development of its competitors (BRANCHOUT and VIADEO) and that you think that MONSTER WORLDWIDE will not stay doing nothing, the investors in LNKD have to worry.It could come back again to $ 45, above all if the floor of $38 is broken for FB !

[David Atherton]

Rodessa, you are absolutely right. P/E is ludicrous. And anyway, this FB flop means one thing for sure - A million non-paying registered users are worth less than they were last week. I have always thought such a user is only worth $10-$20, maybe $30-$40 at a stretch, rather than the $100 FB pundits suggest (950M users $95Bn value).

Unlike Amazon, there is not much money you can earn from users. If an advertiser pays, say $0.10 per click, and an average user clicks, say 50 ads a year, and only 25% of users are active, that's gross revenue of $1.25 per user per year. I wouldn't pay more than $10 for that user.

[vladkri]

When my resume is public on Monster, it means I'm looking for a job. It is very specific in terms of geography by the way. When I'm not looking for a job, my resume is not visible to anybody. The fact that I'm on LinkedIn does not mean I'm looking for a job. Enough trolls call me via LinkedIn and I will close my account without any negative effect on me. I also don't want trolls to rummage through my connections and there seems to be no way to stop that. It's just matter of time before they start peddling Viagra that way and that will be the end of LinkedIn. The whole subject of upcoming giant cash flows is ridiculous. The guys are simply cashing out. Cheers.

[singhj58]

How can you compare ? They are different realms !

[FightenEmOFF]

Again...please don't be hasty!

[ChachiSupreme]

Weak article - constant comparison of apples and oranges.

LNKD is a $11B stock while FB is being valued at $100B - comparing metrics on absolute terms is ridiculous.