June 26, 2011 | In: Technology

Is LNKD a Buy?

I have discussed LinkedIn (NYSE:LNKD) a couple of times before: the first time it was before the IPO, and the second time on May 20th, the same day of the IPO.

The first time I discussed LinkedIn I estimated that its market cap will be anything between $1 billion and $10 billion, and that a fair market cap for LinkedIn will be between $3 billion to $5 billion. The second time I (mistakenly) stated that the stock can still go up by another 50%, but I stated that I was very skeptical of the stock’s price above the $100 level.

Fast forward a month from then, and now the stock is trading at $70, which is only 57% of the stock’s all time high price of $122.70. It seems that the jig is up! At a P/E of just below 2,000, most investors probably saw this coming, and I’m sure we haven’t heard the end of it. The stock will continue its decline until there is at least a remote relationship between the stock’s price and the company’s fundamentals. As I stated before, LinkedIn is not an essential website, and on top of that, it can be easily cloned. LinkedIn, in my opinion, is just another website, that happens to get a lot of traffic, and that media was able to hype well enough to attract average thinking investors into buying it at a very, very high price. Remember all those articles about LinkedIn prior to the IPO? How LinkedIn is going to change the concepts of professional networking and job hunting? Now that we are way past the IPO, it is very rare to find any website even slightly praising LinkedIn and its business model.

In my opinion, LinkedIn’s business model is very delicate, and can be easily crushed by a competition offering a better system (regardless of how many visitors LinkedIn currently has). LinkedIn is a very risky (if not dangerous) stock at this price, and should be avoided at all costs, you can buy it if you want, but think about it this way, what are you exactly investing in? Just think about all the potential risks (Unfortunately, I just can’t see any real intrinsic value in this company to list at least one reason of why investors should buy this stock):

  • A competitor creates a better website that will steal users from LinkedIn (Facebook, perhaps?).
  • LinkedIn gets blocked in some countries for privacy reasons (the same as with RIM).
  • LinkedIn’s traffic goes down. For example, users start losing interest in the website or Google decides to lower the importance of LinkedIn in its search results.
  • Institutional investors start getting out of the stock, because of the very high P/E.
  • LinkedIn is unable to meet the market’s expectations. I think investors will see this in action very soon, when the first earnings report is out! Everyone will see how out of whack the stock price with the earnings of the company.

My advice to any investor on this planet, avoid LNKD, it’s a bad investment. The company didn’t need to have an IPO in the first place, they just did it because the executives wanted to fill their pockets. It’s as simple as this.

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