The Smart Way to Invest in LinkedIn Corp (LNKD)

Source: LinkedIn earnings presentation

The company still has a lot of room for growth; management estimates that its addressable market is worth around $27 billion, so we may have only seen the tip of the iceberg at this stage. When it comes to international expansion, the company is now present in nearly 200 countries, but it has barely scratched the surface in terms of monetizing its user base in high growth emerging markets.

LinkedIn Corp (NYSE:LNKD) is a high-quality business with huge opportunities for growth over the long term, and the company could certainly be worth multiple times its current market value in five or ten years. On the other hand, valuation is nothing short of stratospheric, and this means that investors could be up for some considerable volatility if there is any kind of slowdown in growth or some other disappointment.

When comparing valuation ratios like forward price to earnings or price to sales for LinkedIn versus Facebook and Google, the company is looking much more expensive. LinkedIn deserves a premium for its outstanding growth potential, but it also makes the company quite vulnerable to bad news. A disappointing earnings report or anything like that could generate a big sell-off in such an expensive growth stock.

On the other hand, staying away from the company only because it’s trading at high valuation multiples is not the smart thing to do. Many of the greatest growth stories of our times have traded at sky high valuations for years, or even decades, and they still have delivered substantial returns for investors who had the vision to invest in these names at an early stage.

Starting with a small initial position is probably the best way to play LinkedIn. If the stock then suffers any material setback, investors would get a chance to add to the position at a more convenient price. As long as the fundamental case for LinkedIn remains intact, pullbacks should be considered buying opportunities.

The problem with this approach is that if LinkedIn Corp (NYSE:LNKD) continues firing on all cylinders it may never offer a chance to buy more at lower prices; in that case investors will probably regret having a relatively small position in the company. Still, worse things can happen than seeing a stock take off and never come down after your initial purchase.

Bottom Line

LinkedIn is a disruptive company with self sustaining competitive advantages and superior potential for growth. The biggest drawback is valuation, but investors shouldn´t let that scare them away from this opportunity. Following a patient strategy by starting with a small position and buying on pullbacks could be a sensitive approach to investing in LinkedIn.