Here's Why LinkedIn Will Never See $120 Again

It's really amazing what's possible when you get a group of uninformed traders together and dazzle with a smoke-and-mirrors display. You'll notice I said traders and not investors, because no investor in their right mind would go anywhere near LinkedIn (Nasdaq: LNKD  ) -- especially not after yesterday's meteoric rise, which at one point had the stock up 173%.

Reminiscent of the dot-com bubble days of the late 1990s, traders simply couldn't snatch up shares of the social media website quickly enough. As fellow Fool Morgan Housel pointed out, based on trading in the dangerous secondary markets, shares have moved from under $20 to yesterday's closing price north of $94 in just a shade over one year.

But is this move justified? I have to say in the most resounding way possible, "Heck no!"

Partying like its 1999
History has resoundingly shown that IPO-related euphoria rarely lasts longer than a few days. Some of the largest IPO gains in history were quickly wiped out in a matter of months, including high-profile tech names Akamai Technologies (Nasdaq: AKAM  ) and Geeknet, the company formerly known as VA Linux. Investors quickly became aware shortly after these IPOs that the valuations of these companies had large disconnects from their bottom line results. Since their IPOs more than a decade ago, Akamai has lost 78% of its value while Geeknet is down a laughable 99%.

LinkedIn's IPO has also dangerously encouraged uninformed investors that investing in secondary markets is OK, when in actuality, it's more dangerous than ever. Facebook, Groupon, and Twitter boast implied valuations (according to SharesPost) of $79.4 billion, $14.8 billion, and $8.5 billion, respectively -- yet these companies have yet to fully open their books for financial scrutiny. Groupon, for example, could come under increasing pressure as the barrier to entry into its business is low. Groupon's customer loyalty could disappear in a heartbeat if another site is offering a better deal. Likewise, it remains to be seen if Twitter can even produce a meaningful profit despite its valuation having doubled within the past year, according to SharesPost.

LinkedIn's disconnect
Then we have the actual figures behind the LinkedIn IPO; more specifically, the $243.1 million in recorded revenue in 2010 and the $15.4 million in profits. Using these figures and comparing them to the company's 94.5 million shares outstanding, we arrive at a trailing-twelve month price-to-sales of 39.5 and a price-to-earnings ratio of 624. I'll now pause while you contain your laughter!

I can venture a guess as to what LinkedIn optimists must be thinking: "Well, what about Qihoo 360 Technology (Nasdaq: QIHU  ) and Youku.com (Nasdaq: YOKU  ) ? Qihoo is barely profitable, while Youku is unprofitable, yet both are sporting multi-billion dollar valuations. Why not LinkedIn as well?"

Although I disagree with the current valuation of both companies, I can at least justify the enthusiasm for market leaders in a quickly growing economy that are anticipated to see 70%-plus revenue growth rates next year. LinkedIn is trudging along at double, or triple the market value of these two high-growth companies, yet estimates are set at a similar 70% growth rate and management expects revenue growth rates to continue declining.

LinkedIn: an emotional flaw
We need to see the LinkedIn IPO for what it is: an emotional low point for investors. Traders allowed their emotions to get the best of them, and emotional trading is rarely successful. It's for this reason that I'd be a seller of LinkedIn at these levels, and I'm nearly convinced that the stock will never see the $120 per-share price tag ever again.

Can LinkedIn overcome the hype and head higher or will the fundamentals be the straw that breaks this IPO's back? Share your wisdom in the comments section below and consider tracking LinkedIn as well as your own personalized portfolio of stocks with My Watchlist.

Motley Fool newsletter services have recommended Akamai Technologies. Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. 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 that takes the emotions out of investing.


Read/Post Comments (13) | Recommend This Article (25)

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 20, 2011, at 1:52 PM, Gonzhouse wrote:

    Easy CAPS points: red thumb LNKD

  • Report this Comment On May 20, 2011, at 1:53 PM, jomama777 wrote:

    Ha ha - you're just upset cuz you didn't buy any at $29 when it opened yesterday. Quit crying in your spilt milk!!!

  • Report this Comment On May 20, 2011, at 2:01 PM, TMFHousel wrote:

    ^ It didn't open at $29 yesterday. Opened at $80.

  • Report this Comment On May 20, 2011, at 2:03 PM, bottomfisherman wrote:

    The social networking bubble has to start somewhere. Sad thing is no one will learn from this and Facebook IPO will do the same thing.

  • Report this Comment On May 20, 2011, at 10:21 PM, adam009 wrote:

    Sorry, you have no clue what you talking point. LNKD will see more than 120 soon enough than you can imagine.

  • Report this Comment On May 20, 2011, at 10:26 PM, adam009 wrote:

    I listend to you guys when yoku was 35 and I had to sell.After second quater yoku went up to $50 and more then I didn't see any of you guys' technicality for going it high. Plz don't spread wrong number unless you are fortune teller.

    make money and let others make money

  • Report this Comment On May 21, 2011, at 1:50 AM, GregLoire wrote:

    @ adam009

    It is impossible to predict future share prices with any certainty, and you should be aware of this before investing a single cent anywhere. These articles are opinion pieces; the ultimate responsibility for your investments lies with you.

  • Report this Comment On May 21, 2011, at 2:30 PM, beechtree1 wrote:

    I often wondered whether the very existence of

    companies like LNKD is even legitimate when mostly the revenue they generate comes from selling personal information about private

    individuals without their knowledge and consent,

    having bought this information from (in the UK at

    least) the City Council, the Electoral Register, or

    Companies House). It would seem to me that

    someone, hopefully, sooner rather than later, will test at court the legitimacy of selling for profit, information that has been gathered by the authorities as a requirement of the law.

    And where would that leave the likes of LNKD?

  • Report this Comment On May 22, 2011, at 4:38 PM, TMFUltraLong wrote:

    @adam009,

    Any reason you feel particularly bullish about LinkedIn?

    TMFUltraLong

  • Report this Comment On May 22, 2011, at 10:46 PM, optimist911 wrote:

    I agree with the sentiment of the article, but do believe that LNKD will see at least $250, perhaps quite soon. Like the tulip mania, the current social-networking craze is fueled by irrationality and greed, and there's a ready supply of dumb money that will change hands as the stock gyrates. As with dot-bombs in the 90's, the make-or-break question is determining when the dumb money runs out, signaling the time to dump.

  • Report this Comment On May 23, 2011, at 11:53 AM, chang07 wrote:

    Sean,

    While you may be right with all your facts and figures on LNKD, the bigger laugh for me is how TMF was pushing Amazon, Celera, and all the others back in the same period of time between 1999 and 2002.

    And, with all the knowledge from investing books and MBA schooling, nothing beats market savvy and gut instinct...time to invest is all about price and shares outstanding, time to sell is when stock price depreciates 20% in a recent set period of time. Again, not from the price any investor bought a stock, but from a recent reference point. This is how you win, and if it's down 20% from where you recently bought, exit, track, buyback later. Use some of those free trades from Bank of America. It costs almost nothing to trade these days.

    My point is, TMF and TMF Ultra Long's are consistent with their preaching and alias, and are making their story fit at a particular time in the future. Don't be LONG, be a winner. Which I see you are on CAPS at least, hopefully in real life too.

    I will use CAPS to track LNKD, and predict that once the sideways trading subsides, you'll see LNKD go over $120. Personally, I am thinking about buying LNKD now that it's hit $85/sh.

    Like many have said, we gotta let the options trade, and insiders to settle in.

    As for the "emotional low point," what kind of analysis is that? When all the insiders and traders have made millions on an offering set at $45/sh for the public? There's always more winners at an IPO launch! We're seeing anyone who bought shares at $120/sh exit LNKD due to a 33% retraction in the stock price, nothing emotional there, just simple rules of the trade my friend.

    Regardless, there isn't enough shares of LNKD to meet the demand.

    Nice article, liked your style.

  • Report this Comment On May 24, 2011, at 6:15 PM, scott1020 wrote:

    These articles are pretty boring and predictable.

  • Report this Comment On May 24, 2011, at 6:44 PM, scott1020 wrote:

    Sorry, I do have to add one last comment, it is quite ironic and funny that you claim the emotional flaw and then state that LNKD will never see the $120 stock price again. Were you perhaps emotionally reacting when stating that comment? I hope so, otherwise this may be top 5 dumbest things I've heard for the week. I can only give a top 5 rating for the week as journalism nowadays is pretty crappy in general.

    So you are assuming you can state that LNKD will never go above an $11 billion market cap (MC) again?

    Lets put this in perspective real quickly:

    Yahoo 1999 MC: $140 billion (split adjusted)

    Yahoo 2011 MC: $21 billion

    JDS Uniphase 1999 MC: $251 billion

    JDS Uniphase 2011 MC: $4 billion

    Juniper 2000 MC: $122 billion

    Juniper 2011 MC: $20 billion

    Ok, first of all, as you can quickly see the 90s crap bubble was completely different, not even close to anything that is over-valued today. I'd put my more money on LNKD getting to $120 over seeing such a crazy market to the 90s levels anytime soon. JDS Uniphase had a $1,104 stock price in late 1999 and early 2000, which gives us an example of how crazy things were back then (that's a MC more than Google, Microsoft, etc. today- encompassing a decade of growth not to mention).

    The last recession we had was pretty bad. However, from a stock price perspective companies were not wiped out even close to the levels of the 90s correction. In fact almost all sectors have fully recovered if not moved higher from 2007 levels.

    I do believe that LNKD in is definitely a premium, but common, 90s stuff? No way. And if LNKD is anywhere between $1.5 - 3 billion in revenues in the next 5-6 years, it will definitely eclipse the $120 price mark.

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