Read This Before You Buy LinkedIn

Looks like everybody loves LinkedIn (NYSE: LNKD  ) . The IPO that just a few days ago floated a $32 to $35 price tag hit the market at $45 this morning.

Even that lofty price wasn't enough. The social networking website operator opened at $83 and has surged past $100 per share at noon trading.

There are plenty of good things to say about LinkedIn. The site that connects white-collared pros has become the new way to smoke out job leads, industry news, and peer referrals. LinkedIn virtually connects its 100 million members (and counting). The site served 5.5 billion pages during the fourth quarter of last year. In other words, there are people out there actually using the site.

Revenue more than doubled to $243.1 million last year, as user growth and new monetization efforts kicked in. Profitability isn't very scintillating. After years of losses, LinkedIn squeezed out a modest profit of $15.4 million last year.

However, in the wake of its IPO, the company now has roughly 94.5 million shares outstanding. Is LinkedIn worth today's valuation of $7.8 billion at the open, and nearly $10 billion at the intraday high?

Dice Holdings (NYSE: DHX  ) is the closest match to LinkedIn. Its namesake site provides a community hub for folks seeking IT jobs. Dice also encompasses other niche-specific sites, including ClearanceJobs.com for security jobs and eFinancialCareers.com for prospective moneymakers.

Dice isn't as sexy as LinkedIn, but it did earn more -- $18.9 million -- last year on $129 million in revenue. In addition, Dice now expects a profit of $32.8 million this year (and adjusted EBITDA of $74 million), with revenue climbing 37% to $177 million.

Dice is far more profitable than LinkedIn, though today's debutante is growing its larger top line faster. However, Dice packs a roughly $1 billion market cap. Is LinkedIn really worth 10 times more than Dice? I don't think so.

Analysts see revenue growth slowing at LinkedIn, and expect that a small loss this year will replace last year's profit. Buy in if you want to. I'll write you a glowing LinkedIn peer referral if the company bursts into flames in the coming weeks.

I get that folks are hungry for social networking. If they can't buy Facebook, they'll buy any successful proxy. The IPO pop for China's Renren (Nasdaq: RENN  ) earlier this month, and the wild swings for Latin America's Quepasa (AMEX: QPSA  ) in recent months, prove that demand is greater than supply. However, at the end of the day, a stock must be weighed on the basis of its fundamentals. LinkedIn is an important company, but it's not as valuable as today's investors think.

At what price would you buy LinkedIn? Share your thoughts in the comment box below?

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz remembers when social networks were an offline endeavor. He does not own shares in any of the companies in this story. He is also a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its defiance. The Fool has a disclosure policy.


Read/Post Comments (22) | Recommend This Article (38)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 19, 2011, at 12:53 PM, Borbality wrote:

    Let's not forget that most of us couldn't even buy shares during the IPO if we wanted. The higher the better for the underwriters! What a world!

    Of course it's not worth 10 times more than Dice, but that doesn't mean the stock won't go crazy for a while. I wouldn't want to be around when reality sets in, though.

  • Report this Comment On May 19, 2011, at 1:06 PM, phavkben wrote:

    You just don't know anything. If you were a recruiter you would know that LinkedIn will eventually put monster, dice, career builders and ladders out of business. I'm not commenting on the value of LinkedIn, i'm just saying the author thinking that DICE has a future is absurd. The only good thing that could possibly happen to DICE is that it could be purchased by Linkedin.

  • Report this Comment On May 19, 2011, at 1:07 PM, Tsjoberg wrote:

    Hi,

    I've been following the news and discussions on the new IPOs like RenRen and now Linkedin and the growing number of potential upcoming IPO in the internet world like Facebook, Groupon, Twitter, Zynga...

    I'm a real novice in the world of finance and trading but as renren and Linkedin's shares showed impressive increases in their share prices on their first day, I wanted to ask a few questions related to buying stocks when IPOs are announced.

    How difficult is it to buy shares before IPO of Linkedin, or future ones like Twitter and Groupon for someone that is just starting to trade (with for example 3k$)? Is it related to the amount of money the person is willing to invest?

    And in your opinion, how risky can the investment be on the first day in the stock exchange and on a long term basis like 5 years for stocks like Linkedin, Facebook or Groupon?

    Is there a motleyfool service that provides advices in buying shares before IPO?

    thank you for your replies,

    Thomas S.

  • Report this Comment On May 19, 2011, at 1:19 PM, Obama42012 wrote:

    Aren't you the same author that said E-bay was nothing more than an online flee-market? Your a real expert Ricky, that E-bay stock never got off the ground did it?

  • Report this Comment On May 19, 2011, at 1:33 PM, ServusDei7 wrote:

    I would pay $0.10 per share for LinkedIn, at most. That would give it a more reasonable P/E of 5 based on 2010 earnings of $1.85 million, which is the most I would pay given that average earnings over past 3 years is negative $6.6 million, and that the company's business model is questionable at best. The tangible book value is $1.16, but good luck trying to recover that if the company goes bankrupt.

  • Report this Comment On May 19, 2011, at 2:04 PM, capsloof wrote:

    Reminds me of the dot bomb craze. Home grocer anyone.

  • Report this Comment On May 19, 2011, at 2:05 PM, buffalonate wrote:

    My advice for Thomas S above is to read Peter Lynch's One Up on Wallstreet and the Motley Fool's Guide to investing before you invest anything in the market. Investing without knowing what you are doing is a horrible idea. You should go to Morningstar and find a mutual fund that you are comfortable with and put your money in that. Read those 2 books I recommended and when you feel really confident in what you are doing then you can invest on your own.

  • Report this Comment On May 19, 2011, at 2:07 PM, FutureMonkey wrote:

    I'm cautiously optimistic for LNKD at the initial estimates of 35-40 and would certainly be a buyer at that level. This $9B market cap is way outside a reasonable price even with extremely optimistic modeling for 3-5 years of stellar growth.

    Understanding the business model is more than looking at the negative earnings in last few years and current earnings.

    100M subscribers with desirable characteristics to both advertisers and recruiters. Linkedin earns 1/2 it's money from recruiters and job services wanting access to the database and 1/4 from advertising/marketing and 1/4 from premium services.

    Ultimately their success will depend on the ability to monetize those subscribers. The new strategies have only been in place a short time, so past sales and revenue numbers may not have much meaning. If these strategies pay off the result would be a dramatic rise in earnings in a short period -- much more than organic growth. I suspect that is what most current buyers of the company are banking on. Think if you can make sales revenue of $15 for every subscriber and earn $3 thats $1.5B in sales and 3.00 eps. (purely random number inserted for effect, not a prediction). Of course if they cannot leverage subscribers into dollars and post sales of $3M and earnins of 10 cents per share, then the company is going to go pthbfft.

    Secondary to their ability to generate sales on Subscribers, pay close attention to subscriber growth and churn, trend of unique visits, and trend of page views per visitor/subscriber. If those trends grow organically while profit jumps then look out above.

    Also keep in mind that the jobs market is still in flux, when companies start hiring again then many people will be more comfortable letting go of a job in the hand for a potentially better job elsewhere. Recruiters will start getting busier as well. That should be a positive trend for LNKD as well.

    For me the biggest risk is competition from other social media and job sites. This would be reflected in subscriber churn, visitors, and page views.

    Like I said, I'd be a buyer at $30/share. Taking a pass at $100/share for certain. Still it is nice to see a superheated IPO, which is honestly good for everybody.

  • Report this Comment On May 19, 2011, at 2:21 PM, TMFDiogenes wrote:

    Tsjoberg,

    I'd second buffalonate's advice -- Peter Lynch's One Up on Wallstreet and the Motley Fool's Guide to Investing are excellent reads for beginning investors. They certainly were helpful to me when I was getting started.

    Fool On,

    Ilan

  • Report this Comment On May 19, 2011, at 3:03 PM, ServusDei7 wrote:

    Peter Lynch's book is good. I would also suggest Intelligent Investor by Benjamin Graham, or, if you feel motivated, Security Analysis also by Graham.

  • Report this Comment On May 19, 2011, at 3:14 PM, mtf00l wrote:

    I remember in the eighties when the home shopping networks we're the rage I recieved an offer to purhcase shares pre-IPO at $10.

    I passed and on openning day the shares went to $100. If I were day trading that would have been a sweet $90 per share.

  • Report this Comment On May 19, 2011, at 3:21 PM, catoismymotor wrote:

    I advise skipping IPOs for the first year. After that all the pump and dumpers and greedy but brainless money will find someplace else to go. After that, if you still like the company, buy on the dips.

  • Report this Comment On May 19, 2011, at 3:25 PM, mikecart1 wrote:

    Linkedin & Facebook have 2 of the biggest Income Statement jokes around. Who is paying these worthless companies?

  • Report this Comment On May 19, 2011, at 3:25 PM, MrBuffyJr wrote:

    Dice.... what is that?????!!! I am in IT and this is the first time I hear about that site

    You recommended Baidu when its PE was almost 100 and since the stock has sore 1000%...now you are talking about valuation in the LinkedIn case... I don't get it!

  • Report this Comment On May 19, 2011, at 3:56 PM, Tsjoberg wrote:

    Thank you guys!!! I think One up sounds very good for me!! :) Maybe the intelligent investor after that.

  • Report this Comment On May 19, 2011, at 6:14 PM, romanson3625 wrote:

    When I read some of the posts on this blog I laugh. Whoever think LinkedIn is not worth in the BILLIONS just does not understand how internet companies operate.

    LinkedIn can end up replacing Dice, Monster, Craigslist and 51Jobs all at once. I use LinkedIn from time to time and even though I am not a paying member, there are hundreds if not thousands of ways they can monetize on my membership.

    Facebook is in another ballgame altogether. One day Facebook and Google will go head-to-head with Yahoo and Microsoft in a distant third and fourth. Mark my words.

  • Report this Comment On May 19, 2011, at 7:35 PM, FutureMonkey wrote:

    I'm with Romanson, but not quite up to $9B range. More the $2-3B.

    Lots of people made fun of the Google and OpenTable IPO. I don't think Linkedin is the next GOOG, but probably isn't the next 1999.com bust either.

    I'm cautiously optimistic, but not yet interested in putting real money at risk.

    FM

  • Report this Comment On May 19, 2011, at 7:49 PM, MichaelDSimms wrote:

    I have a Linkedin in account and have had for almost a year. I haven't been contacted by anyone about a job through it. I have had all my contacts made through my accounts on Dice or Monster. I wouldn't pay even $5 a share and was shocked to see the price skyrocket. Make these words in a year or less there will be some very disapointed investors.I will stick with energy (XOM), and Intel (INTC) for Tech. Companies that provide actual products and services. I wouldn't buy Twitter or Facebook stock either, they are fads that will quickly fade away or be replaced by something better.

  • Report this Comment On May 19, 2011, at 9:11 PM, ffbj wrote:

    Sort of new to all this but here is my take:

    So the ipo is at $45 except that only certain insiders, underwriters, institutional buyers, company execs, get in at that price, as the stock opens at $83 per share to the general public. Then, the stock, rockets to $122 and quickly falls to 94 on heavy selling, as (presumably) the insiders,etc...dump the stock, or at least large portions of it. In addition no short-selling for 10 days or so.

    Caveat Emptor, a bit of Latin retained, and spoken first probably a few millenia ago, is still true today. Please elucidate if you think I am off the mark, just my take on the days proceedings.

  • Report this Comment On May 19, 2011, at 10:10 PM, extremist wrote:

    I'd buy it for the same reasons people were buying dot-bomb shares in 1999 at obscene prices and still saw them double and triple before it was time to pay the piper. The real trick is knowing when to dump.

  • Report this Comment On May 21, 2011, at 3:56 PM, MrSimple wrote:

    Linked in isn't to far off if you understand the cost structure and potential income.

    If the annual operation cost is at $300 million a year today it could easily stay in this range and continue to grow rapidly. At 100 million users at $15 income per user is 1.5 billion. Subtract $500 million in annual costs and you net 1 billion. 10 multiple equals 10 billion value.

    Once membership stops growing at a rapid pace they can cut back probably quite a bit on their operational costs.

  • Report this Comment On May 21, 2011, at 8:35 PM, lowmaple wrote:

    IF you are lucky you can buy these at the beginning of the day and then sell later for some pre odered price you've chosen. That is if the IPO goes up at all. some don't

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