LinkedIn model

rls

WallStreetOasis.com

rlsAny model that tells you not to buy it is probably good enough.

I'm long, want to fight? Short FB, long LinkedIn.

LinkedIn ($102 as of this writing) is trading at about 850x TTM and, depending on who you ask, about 120-150x forward 2012 earnings. What exactly is justifying that premium? During the height of the NASDAQ/tech bubble, the average P/E was 330. LinkedIn is more than 2.5x that. Obviously, investing is a mix of art and science- the numbers are not the only determinant. However, numbers should inform how much you are paying, closely guided by a firm's history. I'm a value-investor by nature, so this is something I wouldn't want to touch with a 100-foot pole.

If the U.S. rolls over again, which I fully expect it to, the multiples on this stock are going to get crushed. Or worse, if a financial calamity is triggered by Europe, China, Japan, or some other exogenous event that causes a selloff, those hopeful numbers are going to be re-priced considerably.

The business model for making a tremendously more money isn’t obvious (via advertising, premium subscriptions, and hiring solutions). Facebook has a wealth of information several times the magnitude of LinkedIn with a vastly larger userbase- and they are having trouble monetizing it. Maybe I’m missing out, but I feel no temptation to upgrade from my free account to a premium account.

At the current price, you are paying for pure hope. If everything goes better than perfect and LinkedIn makes 42.5x its current earnings, it would then trade at a multiple of 20x earnings. And such an extraordinary expectation would require extraordinary evidence- I have yet to see it.

Now, I can already hear your retort about it being a growth stock. And maybe you are right about the growth aspect, maybe not. Nothing I can say will dissuade you as to how expensive this stock is because precedents are routinely flouted during manias. But I would caution you that there is such a thing as paying too much for growth as with Facebook…and LinkedIn.

100% agree with you that you have to believe in a great growth story to justify $99/share (where it is now)...but that is exactly what I believe - both on the top line, and also in it's ability to dramatically increase margins as a web based business as that scale hits 500m-800m users.. People are valuing Facebook at the same revenue multiple as LinkedIN (finally falling more in line, like I was screaming about 2 months ago, which is why I also made 150% in 24 hrs on my FB puts right before the last earnings call)...

First off, I would argue that the $ per user potential on LI, is much higher...I think once the scale is there (and they are RAPIDLY getting there), advertisers will see LI as a much more professional network to advertise on...even if the pageviews pale in comparison, we are talking about $ per user here...and even if only a fraction of the members upgrade, at least the HAVE a paid option unlike FB. I'm not expecting the stock to continue to trade at these EARNINGS multiples, but if it trades at ~10x rev and 20x earnings, I think it's a $200 stock in ~3-4 years. If it does trade back down below $89/share, I will happily double down at $70 and $60.

I believe in management and the company long term...for the record, I also believe in facebook, I just think it's MUCH further along in it's life cycle as a business (they've been selling ads for YEARS) and we wont see revenue or earnings increase nearly as much as we will see on LinkedIn over next 5 years.

...but I could be wrong!