Hot Stocks: Why LinkedIn Is More than Just a "Bubble"

[Editor's Note: This analysis of LinkedIn Corp. follows the company's high profile public offering. To read a separate story about initial public offerings (IPOs) that appeared yesterday (Thursday) in Money Morning, please click here.]

Email
    Text size
LinkedIn Corp. (NYSE: LNKD) has had quite a ride since its initial public offering last week.

The stock surged 109% in its first day of trading to a peak of $122.70 a share, but has since tumbled back to close yesterday (Thursday) at $78.63.

Optimism about the potential for new-wave social media companies and a genuine thirst among investors desperate for a serious growth play drove LinkedIn's meteoric rise. But profit-taking and fears that the stock had entered "bubble" territory led to a quick drop.

  • Print
Latest Comment

As Eric says it is clearly way overvalued on any remotely sensible basis - this …

But while LinkedIn may be somewhat overvalued at current prices, it's more than just a bubble. It's a company that's been around for nearly a decade. And in that time it's acquired a large band of customers, raised substantial revenues, and grown into a global competitor.

So let's take a closer look at the company and its prospects.

Bubble Trouble

First, forget everything you've heard about "Tech Bubble 2.0."

No analyst or newspaper publication in the country has been able to resist comparing the lofty valuations of new-generation Internet startups such as Facebook Inc., Twitter Inc., Netflix Inc. (Nasdaq: NFLX), and LinkedIn to the dotcoms that rose to exorbitant peaks in 1999 before flaming out in 2000.

But these comparisons aren't accurate, for the simple fact that too much has changed between then and now.

A decade ago most Internet users were married to sluggish dial-up modems, phones didn't come with keyboards and Internet access, and sleek touch-screen tablets were still science fiction.

Now every Starbucks Corp. (Nasdaq: SBUX) and McDonald's Corp. (NYSE: MCD) restaurant offers WiFi, and the gap between cell phones and personal computers is rapidly narrowing.

Additionally, Web access, computer hardware, servers and other infrastructure comes much cheaper.

Most importantly, compared to the last tech bubble, relatively few Internet companies are today positioning themselves for offerings. And the companies that are currently gearing up for offerings have better business models and proven earnings.

"The companies going public now are fairly large companies, with real users, real customers, real revenues, multiple revenue sources," venture capitalist Mark Aronson told NPR.

For instance, LinkedIn has been around for eight years. The company generated $243 million in revenue in 2010 through advertising revenue and premium subscriptions. And it brought in $94 million of revenue in the first quarter of 2011, which was more than double the year-earlier total.

Of course, that's not to say some things haven't changed. U.S. Federal Reserve Chairman Ben S. Bernanke, like his predecessor, has chosen to flood the market with cheap money, inviting speculation and sky-high valuations.

But that problem is not confined to tech stocks - it extends to all sectors and asset classes.

Neither gold, nor silver, nor oil will be able to survive at current levels once the Fed is forced to confront the high levels of inflation embedded in the economy.

Still, in the short term stocks and commodities will continue to benefit from the Fed's loose monetary policy and quantitative easing programs - that is until the central bank is forced to raise interest rates.

LinkedIn Abroad

Of course, there's nothing LinkedIn can do about monetary policy. So long as there is liquidity sloshing around the markets many stocks will be overvalued.

That includes LinkedIn, which at $8.9 billion is valued at 35-times its 2010 revenue and more than 500-times last year's meager 17-cent-per-share profit.

Still, that doesn't mean LinkedIn is doomed to failure. It just means investors have to wait for a fairer price. Indeed, patience will be key for any LinkedIn investor, as the company has already said it doesn't expect to turn a profit next year.

Instead, LinkedIn will invest in technology and international growth.

It may surprise you to learn that LinkedIn actually has more overseas users than it does domestic users. Of the company's 101 million total users, 45 million are located in the United States with the remainder abroad.

LinkedIn already has existing operations in much of Europe, especially the United Kingdom. Now the company is looking to expand its presence in the Asia-Pacific region.

"According to [research firm] Comscore, from March of last year to March of this year, we grew 130% in [Asia-Pacific]," said Arvind Rajan, LinkedIn's vice president and the managing director of its Asia-Pacific unit. "We think that by having a presence here, by expanding our footprint in Asia, we'll see continued, sustained growth."

LinkedIn, whose offices in India and Australia are each just 18 months old, plans to open its Asia-Pacific headquarters in Singapore later this month, and a Japan office later this year.

"Singapore is of course smaller than the markets in India and Australia...but it increasingly moved up higher on our list because our user penetration in Singapore was so high and it's an incredibly vibrant economy," Rajan told ZDNetAsia.

LinkedIn has more than 540,000 users in Singapore, which equates to about half the professional workforce there. But that's not all. The city-state will also serve as a fulcrum for LinkedIn's Asia-Pacific business ventures.

"It's not just the Singapore market by itself, but Singapore has access to customers that have a regional responsibility," said Rajan. "So I'm not only selling to a particular company for their needs in Singapore, but their needs across the region, which makes it so exciting."

LinkedIn is particularly interested in China, where the company believes it could quickly reach 100 million working professionals.

"We hear from our members globally every day, 'When are we going to be bigger in China?' They want to do more business in China. They want to hire people in China," Rajan said at the CHINICT tech conference in Beijing last month. "We also hear from Chinese companies that they want to hire people on a global basis."

Other social media networks such as Facebook and Twitter have been blocked in China, but LinkedIn, which is more of a professional Website, has had fewer problems. However, LinkedIn was temporarily blocked in February due to an anonymous online protest call made on the site.

A greater hurdle will be the competition that's been fermenting on the Mainland. China's homegrown version of LinkedIn, a site called Ushi (Outstanding Professional), could pose a serious challenge, as could another local rival, Tianji.com.

Still, LinkedIn continues to lead in the United States, the most developed market for professional networking. It also has made significant inroads into Europe and Asia, claims to be adding 1 million members every 10 days, and more than doubled its first-quarter revenue this year.

On top of that, the company just executed the biggest Internet IPO since Google Inc. (Nasdaq: GOOG).

So if LinkedIn is a bubble, it's an awfully formidable one.

News and Related Story Links: