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LinkedIn (LNKD) vs Yahoo (YHOO)

May 27, 2011 12:14 PM ETAABA, MSFT
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One thing that could never convince me in today’s market is that there is so big a gap between the valuation of LinkedIn (LNKD) and that of Yahoo (YHOO). LinkedIn and Yahoo are both internet companies and both of them primarily rely on web site traffic to value their stock price. Some may argue that LinkedIn is a newbie to the capital market and probably has a better business model, but to me they are quite similar. For an internet company as long as it has enough traffic and could keep that traffic or grow more traffic, it has the advantage to jump into a new traffic-based business model easily and get more revenue.

As of May 30th 2011, LinkedIn (LNKD) is valued at Trailing P/E (ttm, intraday) =1,318.21. (Data from Yahoo Finance). That is astonishingly high and even far much higher than some of the leaders back in the Internet bubble.  What’s more, its Diluted EPS (ttm) is only $0.07 and it has an ashamed Quarterly Earnings Growth at 14% compared with its high PE. The worse thing is that LinkedIn’s traffic ranking on Alexa is only at place #17 globally and #11 within US. Its “Percent of global pageviews” is 0.5%.

Then let’s take a look into Yahoo (YHOO). Its Alexa Internet Traffic Ranking is #4 globally and #3 in US. Its “Percent of global pageviews” is 1.65% (at the moment I’m writing this article). Yahoo’s Trailing P/E (ttm, intraday) is only 18.82 and Diluted EPS (ttm) is $0.85. The issue for Yahoo is that its Quarterly Earnings Growth (yoy) is -28.10%. That decline is also reflected on its “Percent of global pageviews” ranking on Alexa that has slipped down from 2.5% to 1.68% in the past two years. However, LinkedIn’s “Percent of global pageviews” has climbed up from 0.1% to 0.5% in the past 2 years.

No doubt that LinkedIn’s traffic and earnings are moving up while those of Yahoo are moving down. However, don’t forget that it is easier to move from a low position to a relative high position, and much harder to move from an already very high position to a higher position or even to stay at that high level.

Although Yahoo has experienced a down turn, I believe that Yahoo has big potential to improve its bottom line from here. The worst time has passed. I have noticed that Yahoo is cutting its money losing services and improving its social network features. (I sensed they are developing their own Facebook now, because I accidentally received an email that led me to a yahoo site with a lot of social features.)

If we forget about perceived growth potential, from the valuation point of view do you think LinkedIn’s $0.07 earnings/price is worth more than 1000 trailing P/E? And what do you think if we compare it with Yahoo who has a $0.85 earnings/share with a P/E at 18.5 and a traffic ranking of #4 in the world? I bet you will give them a second thought.

The conclusion is that the stock price of one of them is wrong. Either Yahoo is very undervalued or LinkedIn is very overvalued.

Disclosure: I am long YHOO.

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