6. Grossly overvalued
Rule Breakers frequently sport ridiculously high PEs, which in hindsight may have been completely justified based on future growth. LinkedIn with a current PE of 792 and a projected PE of 113 for 2013 certainly fits this mold. (It makes Amazon look cheap with a PE of 176 projected for 2013.)
Another comparison can be made to company that is arguably a Rule Breaker already: Facebook Inc (NASDAQ:FB) which sells for the astronomical PE of 1903! Facebook disrupted social media and has become a giant in the space with more than 1 Billion users. LinkedIn is a mere babe with about 200 million users.
What makes LinkedIn particularly attractive at this time is that it is a relatively small company with a market cap of $16 Billion or so growing at a blistering pace and consistently beating expectations by a wide margin. LinkedIn crushed analyst expectations last week and its stock price popped more than 20% on Friday, 2/8/13. Revenues jumped 81% year over year and EPS surprised way to the upside. Analysts expected 19 cents a share and the actual number was 35 cents a share. As expected, a herd of analysts upped their projections which caused quite the short squeeze in the market and thus the more than 20% jump in stock price. Given all of this the valuation is not as bad as it first appears given the pace of growth and the potential for domination of its sector.
The only real competition right now is Facebook, but most professionals do not like mixing their casual Facebook persona with their businesslike LinkedIn persona. Facebook is being used as a repository of the life outside work (drunken party pictures and all), while LinkedIn is more dedicated to promoting your career by highlighting your professional achievements. While Facebook makes most of its money from advertising, LinkedIn has a good mix of revenue from advertising and user fees. Recruiters are finding it increasingly difficult to do business without paying a toll of sorts to LinkedIn. LinkedIn management sees this clearly and has been raising prices, thus the upwards revision in EPS estimates.
LinkedIn is doing to the headhunters and recruiters what Amazon did to independent book stores, driving them to extinction. The recruiters are like dinosaurs watching a giant comet head towards them, that comet is LinkedIn, and it is getting brighter and brighter as it squeezes the recruiters out of business by offering to connect professionals to job seekers. The LinkedIn clientele is white collar and in this environment acutely focused on polishing their career development. LinkedIn offers the services they need and is dominating the sector by building an ever-expanding moat with the use of its social media fortress.
The bottom line for LinkedIn is that despite its recent run up, the future is so bright you will need shades. Wait for the inevitable dips in stock price and buy with caution, but my 5-year projection is that LinkedIn will easily be a 3-4 bagger and possibly a 10 bagger in time. Just watch out for upstarts that may disrupt its model.
The article LinkedIn Is Poised to Deliver Outsized Returns originally appeared on Fool.com and is written by Erick Santos, M.D., Ph.D..
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