1 Social Network That's Still a Buy

How quickly investors forget how good LinkedIn's (NYSE: LNKD  ) growth story is. While the stock is only down slightly since news of a security breach broke on Friday, the story certainly looks bad.

A team of Russian hackers broke into a handful of sites and posted online a reported 6.5 million stolen passwords. In virtually all the cases, LinkedIn says, only the passwords were compromised while identifying user information remained safe.

"At the time they were initially published, the vast majority of those passwords remained hashed, i.e. encoded, but unfortunately a subset of the passwords was decoded," wrote LinkedIn director Vicente Silveira in a blog post.

In the days since, LinkedIn has disabled accounts it believes to be at risk. We don't know how many users were affected. All we know is that an indeterminate number were contacted to change their passwords for security purposes. Most, if not all, of that work should now be complete.

The news has only added to recent share price pressure, with LinkedIn now trading about 22% off its 52-week high of $120.63 a share for a market value of $9.67 billion. Not bad for a company disrupting an industry that brings in billions in revenue annually.

Let's also remember the nature of LinkedIn's business. This isn't a transactional network in the same way that Amazon.com, eBay, and even Facebook (Nasdaq: FB  ) is. As such, it's not clear a more penetrating breach would have dramatically increased the risk of identity theft.

Finally, consider history. With this breach, LinkedIn joins an esteemed group to have been hacked:

  • Facebook, which suffered a breach in January 2011 when a hacker pretending to be co-founder Mark Zuckerberg posted to Zuck's fan page a proposed "social" fundraising strategy that would end-run the IPO market. (In hindsight, that might have worked out better for some.)
  • Sony (NYSE: SNE  ) , whose PlayStation network was hacked last spring. Extended outages left angry players looking elsewhere for entertainment.
  • Yahoo! (Nasdaq: YHOO  ) , which suffered a breach in 2008 when a hacker exploited a weakness in the company's email retrieval system to break into then-VP-candidate Sarah Palin's inbox.

The message? LinkedIn has arrived, even if investors don't yet see value in how the company is disrupting the recruiting business. Billions are at stake, says one of our top tech analysts, and he's encouraging investors to turn their attention from Facebook to LinkedIn as a result. Full access to his research is freely available here -- but only for a limited time, so be sure to act quickly.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Apple and Google at the time of publication. Check out Tim's web home, portfolio holdings, and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Facebook, LinkedIn, and Amazon.com. The Motley Fool has sold shares of Sony short. Motley Fool newsletter services have recommended buying shares of eBay, LinkedIn, and Amazon.com. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (6) | Recommend This Article (5)

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  • Report this Comment On June 12, 2012, at 3:52 PM, Glasera wrote:

    Are you kidding? LinkedIn is the most useless, dumb 'networking' site yet. It looks like a scam site, navigates like a yahoo 'my first website' page from 1999, and seems to fall of the face of the earth for periods of time before, about every two years, it reemerges unannounced with a slew of what MUST be fake invites from my friends in my email.

  • Report this Comment On June 12, 2012, at 4:34 PM, TMFMileHigh wrote:

    @Glasera,

    >>Are you kidding?

    Nope, nor are the hundreds of businesses using the service to find worthy hires. Hiring Solutions has enjoyed triple-digit revenue growth in each of the last 12 quarters.

    Thanks for writing and Foolish best,

    Tim

    --

    Tim Beyers

    TMFMileHigh, Motley Fool Rule Breakers Analyst, Supernova Odyssey I Portfolio Contributor

    Web: http://timbeyers.me

  • Report this Comment On June 12, 2012, at 5:51 PM, Glasera wrote:

    Depressing...

  • Report this Comment On June 12, 2012, at 6:00 PM, cooter1127 wrote:

    I apologize, Mr. Beyers, but I have to respectfully disagree with your analysis of Linkedin. I do agree that they do have a superior business model to just about any other social networking site and they seem to be heads and shoulders above their peers in monetizing their user base. However, I feel that the current price is still extremely overvalued, even based on (what I think are liberal) strong earnings projections, P/E is sitting north of 500 (weren't analysts up in arms that Facebook had a PE of 100 at its IPO?) and I was not able to find a current forward forward P/E but the last time I saw a few weeks ago (prior to the hacking related price drop) it was siting north 80 even if the recent declines have pushed it down to 70 it seems much too high. Furthermore their growth in earnings has come with a decline in profit margin, which I don't see as a good sign for a company looking to gain new market share in well established industry like headhunting and marketing consulting.

    Finally I am not confident that Linkedin provides services that can maintain a growing user base to support their business model, I do not find their site navigation to be very intuitive or user friendly and the amount of SPAM friends and comments on my message board was surprisingly high (Eerily similar to the Myspace landscape circa 2007-2008) I feel that site problems and high incidents of SPAM will alienate fickle social networking users and send them to one of the many competitors in which case Linkedin can have the greatest business model in the world but with no users to monetize they will not make any money.

    I realize that the social networking is the way that the wind is blowing right now and as an analyst you are looking at Linkedin as the best play in the industry (which I probably agree that it is) but I think the best play right now is to stay out of the social media industry altogether until we can locate industry leaders with staying power and a track record in both maintaining and in monetizing site users, and prices come down to reasonable levels relative to earnings. Maybe I am missing something so please feel free to refute anything I have said.

    Thanks and nice article keep up the good work.

  • Report this Comment On June 12, 2012, at 6:33 PM, fennecfoxen wrote:

    Don't think of LinkedIn as a useless professional-networking/recruiting site. Think of them as a useless professional-networking/recruiting site that's trying to break into the enterprise software business (with purchases like SlideShare).

  • Report this Comment On June 12, 2012, at 11:51 PM, somethingnew wrote:

    Linked in to me is the kind of stock in which you should "buy what you don't know." I've had a linked in account for about 3 years. I only use it to add people who add me then I immediately log out. I only signed up because somebody added me. I think it's pretty pointless and I don't really know why people use it except they do and the company makes bank in the process. I've learned to appreciate opportunities like these. I missed out on Apple because I didn't apply the "buy what you don't know" principle. To this day I still can't figure out why anyone would buy any I-product but they do and I still only know maybe three people personally who have ever bought an Apple product. I can't look to people around me for the appeal of an Apple product but I know by the numbers somewhere there is appeal. I think Linked In may just have that same appeal based on the numbers they have been putting up.

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