Buy, Sell or Hold: Now's Not the Time to Connect to LinkedIn Corp. (NYSE: LNKD)

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Linkedin Corp. (NYSE: LNKD) made a lot of headlines this summer with one of the most successful initial public offerings (IPOs) since the dotcom bubble.

However, that IPO has left the company slightly overvalued. At current levels LinkedIn has a market cap of almost $10 billion and is trading at more than 30-times 2010 sales. And while the company has guided third-quarter and full-year revenue higher, it also has warned that it won't be profitable in 2011.

That's not to say LinkedIn doesn't have some real advantages – it does. The company has performed very well in some areas and operates in an attractive niche. But it's also facing some serious headwinds that include market saturation, pressure from short-sellers, and low revenue expectations.

For those reasons, LinkedIn is a "Hold" – at least until its share price more closely aligns with its fundamentals.

A Closer Look at LinkedIn

Let's look at the positives first.

LinkedIn has $106 million in cash and no debt. The company's second-quarter revenue more than doubled from last year to $121 million. Revenue from marketing solutions surged 111% to $38.6 million, and sales of premium subscriptions increased by 60% to $23.9 million.

These results are no fluke. As a social network focused on professionals, LinkedIn is a valuable resource for unemployed workers – and there are a lot of people looking for jobs right now.

LinkedIn now has about 120 million members. That's good, but it also means that the company has basically penetrated its targeted audience in the United States and must grow its international exposure. It also needs to monetize its network of unemployed members.

LinkedIn plans to reinvest its profits, giving the company little-to-no expectations of real net earnings in 2011. Typically, companies that have a market cap of $10 billion have already gotten their growing pains out of the way. But that's not the case here, which testifies to the fact the stock is overvalued.

LinkedIn shares closed Friday down 4.36% at $91.36. At current levels, the company has a Price/ Earnings (P/E) ratio of nearly 2,300, which makes the stock extremely rich, from the point of view of a value investor. This is about buying future undefined growth.

Action to Take: Hold Linkedin Corp. (NYSE: LNKD)

In a market that is extremely volatile, LinkedIn is a "Hold." The stock already has gained about 100% from its IPO.

While LinkedIn is growing its fundamental numbers, and its second-quarter results released showed real growth, the market value of the company is still way ahead of itself.

(**) Special Note of Disclosure: Jack Barnes has no interest in LinkedIn Corp.

About the Writer: Columnist Jack Barnes started his career at Franklin Templeton in 1997. He started out in the company's fund-information department – just as the Asian contagion infected the Asian tiger countries.

Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.

Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning on Mondays.

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  1. Buryl J Williams | August 22, 2011

    sorting out the present conditions and trying to see what future llooks llike Buryl

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