3 Reasons to Sell LinkedIn

If you thought that sobered up investors would cool on LinkedIn (NYSE: LNKD  ) a day after its scintillating IPO, Mr. Market has a surprise kegger for you.

Instead of The Hangover's trio trying to retrace their steps to figure out the damage done in their drunken stupor a day earlier, this party's just getting started. Shares of the career-oriented social networking hub opened 8% higher this morning, clawing its way back to a nearly $10 billion market cap.

I was able to get in touch with Dominic Penaloza, CEO and co-founder of Ushi.cn. As China's top professional network, few outside of LinkedIn's freshly christened billionaires should be as pumped over yesterday's monstrous debut as the folks at Ushi.cn. After all, if the market loved LinkedIn, it may as well start loading the confetti shooters and balloon drop for China's LinkedIn.

Penaloza is naturally pumped about the niche, but he also has kind praise for LinkedIn.

"Although a lot of pundits voiced opinions that the valuation metrics are wild, I believe the monetization of LinkedIn has only just begun," he told me.

My passport is stamped with Port Punditry, but I can see where Penaloza's excitement comes from. If professional networks will disrupt the conventional recruiting tools through Monster Worldwide (NYSE: MWW  ) , media-owned CareerBuilder, or China's dot-com darling 51job (Nasdaq: JOBS  ) , the punch bowl is just getting spiked at LinkedIn. However, LinkedIn's already worth five times more than Monster and 10 times more than industry-specific Dice Holdings (NYSE: DHX  ) .

Global domination has already been discounted at LinkedIn. What will it do for an encore?

I have three reasons to be wary of LinkedIn at this point, despite the promising fundamentals. Let's dive right in.

1. The market is limited
Facebook has more than 600 million registered users, or six times as many as LinkedIn's 100 million connections.

This isn't really a surprise. Facebook is a nostalgia machine and real-time gossip hound for the masses. High school kids, retirees, and most worker bees have no reason to warm up to LinkedIn's white-collared collective.

Bulls will argue that this is LinkedIn's strong suit. Advertisers will flock to the career-minded professionals with money to burn. I get that, but this is also the same crowd that won't fall prey to the movie trailers and fast-food ads that mainstream sites thrive on.

LinkedIn also is no slam-dunk to be a global juggernaut. Investors who think that LinkedIn has cornered the global market need to go out and see the world.

Penaloza points out that Germany's XING.com and France's Viadeo have been able to hold up well in their respective markets, despite LinkedIn's global intentions.

"Professional networking is a local thing," Penaloza explains, a point that holds especially true in his home turf.

"As for China, the local people require a local service," he says. "Ushi is made in China, made by Chinese, made for China."

He's right. Stateside search engines and marketplaces have failed to topple the hometown faves.

2. Today's IPO poppers are tomorrow's plungers
A "hot" dot-com IPO hasn't been sustainable in recent months.

  • Content farmer Demand Media (NYSE: DMD  ) popped after its January IPO, trading as high as $27.38 last month. It's gone on to shed nearly half of its peak value.
  • Chinese social network Renren (NYSE: RENN  ) traded as high as $24 on its first day of trading this month. The stock is down to the low teens today.
  • Youku.com (NYSE: YOKU  ) barreled in as China's leading video-streaming website. It has shed nearly a third of its value since peaking last month.

In short, these stocks may have been popular for a few months, but investors began to bail long before their lock-up expirations gave insiders the same opportunities.

3. Valuation really does matter
We're not in an Internet bubble. When the world's leading search engine is fetching an earnings multiple in the teens, the chances of a sudsy collapse for the dot-com market as a whole is nonsense. We are in a LinkedIn bubble, though.

The "greater fool" theory is alive and well with folks who think they can buy a $10 billion company and sell it to someone else for $15 billion or $20 billion in the future.

LinkedIn earned a mere $15.4 million on $243.1 million in revenue last year. It's growing, but this is a company that will never have the fat net margins of China's lightly taxed enterprises. There's a material ceiling in terms of membership growth and global reach. It will also always be susceptible to traditional social networks and recruiting services that will want in on this specialty even more given LinkedIn's outlandish valuation.

Enjoy the party while it lasts, LinkedIn longs. Just make sure you're not around when the cops come to crash the kegger -- as they inevitably will.

What is LinkedIn's upside in terms of membership base and revenue? Share your thoughts in the comment box below?

Motley Fool newsletter services have recommended 51job. 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. The Motley Fool has a disclosure policy.

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.


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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 20, 2011, at 2:33 PM, hp65000 wrote:

    Looking at flurry of fool.com articles, it appears that writers of these articles feel they left out of this party in disbelief. It also appears that they're doing this to preserve value of some traditional job search companies like monster. This seems like a concerted effort to bring down the stock price of linkedin from such an influencial community.

    Why don't you go back and refer to all such articles when Google IPO'ed? LinkedIn has a nice concept, strong fundamentals and lot of long term investors' belief.

    I'm a fool myself. And i've made bad decisions reading articles from fool.com eg. There was an article on "Amass your wealth with these stocks" - in a way, fool writers strongly recommended a stock - Quantum corp ($3.90 at that point) in that article. Within few weeks that stock was trading near $2.20!

    I also bought AKAM stocks after reading foold article and the same thing happened.

    I read article "5 dumbest stock moves of the week" when Coinstar announced that it will start offering streaming media. The stock popped the same day. And i bought it. But after reading "5 dumbest stock moves of the week", i quickly sold the stock at loss. Within few weeks, the stock soared to $56 from $44 where i sold.

    I've stopped my paid subscription with fool.com after that. It seem like fool.com articles always misguide investors.

    With above examples in past 3 months, i recommend people to not blindly trust articles from fool.com and don't buy in to what they're saying.

    thanks.

  • Report this Comment On May 24, 2011, at 7:29 PM, scott1020 wrote:

    Agreed, it is very unfortunate that articles bash companies so quickly before we can even get a chance to see how they will perform. Heck instead of going public this early, LNKD should have waited another 5 or even 10 years where we could really know what we are getting into. Then there would be no risk and we could all feel great and say what the reality was.

    Facebook, Twitter, any other social whatever company as potential competitors, I really hope they do not waste money in this form of business because Facebook may have a bunch of users, but they do not have much to offer their users except for games, gossip, the occasional long range connection, and flirting. Facebook would have better luck launching a dating site than competing in hiring solutions. If anything Facebook and Twitter can be more easily replicated than LNKD too.

    MWW, I cannot wait to see this co. crumble over the next 5 years. Competition is great, it eliminates inefficient companies. Think of Blockbuster, Walmart and Amazon. None of them could take market share from Netflix, and Blockbuster became a laughable disaster. I see MWW following similar suit as companies adopt better integrated complete hiring solutions.

    Could LNKD acquire an international company? Maybe, maybe not, Germany and France make up all of Europe as international competition apparently.

    China? Well, let me think about who has had difficulties in China, Google, Groupon, Facebook, I guess it is a reoccurring theme. Heck where does Google go from here?

    The reality is that EVERY company has risks, that should always be taken into account and measured against financial performance (we are all doomed) as well as the companies goals and objectives. TMF is just playing its role as a pon just like Cramer, WSJ, and any other online news company.

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