It's hard to argue with investing in blue chip stocks, as they tend to belong to established companies with relatively reliable earnings -- so much so that they typically pay dividends. Of course, there's good money to be made investing in smaller or less-proven companies that may be on their way to becoming blue chips -- companies such as LinkedIn Corp (NYSE:LNKD.DL). Let's assess the company on several key traits of blue chip stocks and see how it fares:
Track record of performance over time
LinkedIn's stock has shed a few percentage points during the last year, but it has rewarded longer-term shareholders well in its short public life, averaging annual gains of about 39% during the past three years. (A blue chip stock, on the other hand, has often been public for three decades or more.)
For those not familiar with the company, LinkedIn is something like a business and career-oriented Facebook, where folks maintain their resumes and connect with others, and where employers can seek workers. Launched in 2003, LinkedIn is now the world's largest online professional network, and now has more than 300 million members worldwide, two-thirds of whom are outside the U.S. It's available in 23 languages, at last count.
Blue chips tend to be industry leaders or major disrupters, and they typically perform well over business cycles. LinkedIn disrupted the job-search process, and is a major player in social media. There's reason to believe that it can perform well in good economies and bad, as folks are likely to seek better jobs in good times, and any job in bad times.
Strong balance sheet, revenue growth, and cash flow generation
LinkedIn's balance sheet is solid, with no debt -- and cash and short-term investments growing from $90 million in 2009 to more than $2.3 billion, recently. The company's track record isn't terribly long, but it's still quite impressive, with revenue growing fifteenfold during the past five years, and the company generating more than $100 million annually in free cash flow.
Substantial and reliable free cash flow helps companies initiate and sustain dividend payments, but younger and faster-growing companies usually need to plow all extra cash into furthering their growth. LinkedIn is no exception; unlike many blue chip stocks, it pays no dividend -- yet.
Lots to love, and some worries, too
The company's business model is also a big attraction, as it features competitive advantages, such as the network effect. If you want to be seen by many potential employers, LinkedIn is where the greatest number of them are. If you're looking for networking contacts or potential hires, you'll find the greatest number of candidates on LinkedIn. This doesn't mean that LinkedIn can't be supplanted one day, but the bigger it gets, the harder it will be for a competitor to take over.
Meanwhile, the company is successfully capitalizing on the mobile front, which is growing in size and importance. About 45% of LinkedIn's traffic comes from mobile users, and the company has multiple apps out there serving different purposes, such as staying connected with contacts and job searching. LinkedIn is aiming to become more of a content site, too, encouraging users to post and publish.
International expansion looks to be a great growth driver, and the company's recent foray into China is off to a fast-growing start. Through its purchase of Bizio, LinkedIn aims to build its business-to-business, or B2B, marketing, too.
LinkedIn isn't a long-term guaranteed success story, though. It does have competitors, and would-be competitors, such as Facebook. Whereas many of them rely mainly on advertising revenue, though, LinkedIn has a more diversified set of income streams, including some relatively stable subscription dollars.
Yea or nay?
Some dictionary definitions for the term "blue chip" are that the stock be of the highest quality, and reliable. In other words, investments in blue chip stocks should help you sleep at night. LinkedIn hasn't reached that point yet, but it stands a decent chance of becoming a blue chip stock one day.
On balance, the company seems well worth considering for your portfolio, if you're comfortable with above-average risk. By most measures, it seems overvalued; but it's still priced lower than many peers, and to some analysts, is worth its premium.