What: Shares of professional online networking site LinkedIn (NYSE:LNKD.DL) gained $4.03 on Monday to close at $267.43, extending its big gains from Friday after two research firms upped their price target on LinkedIn stock. Shares are now up 15.2% over the past three trading sessions.
So what: According to ratings aggregator Briefing.com, both CRT Capital and Wunderlich Securities boosted their price targets on LinkedIn stock while keeping their rating unchanged at "buy." CRT Capital raised its price target, or perceived fair valuation target for LinkedIn, from $250 to $315, while Wunderlich increased its target 20%, from $250 to $300.
Although LinkedIn's quarterly earnings report was the primary impetus for the price target increases, Wunderlich Securities' analyst Blake Harper was particularly bullish with regard to the company's Sales Navigator solution, which uses algorithms to help personalize sales leads. Harper suggests that Sales Navigator's market potential in the United States alone could be $4 billion-$6 billion, and more than $10 billion in total around the world. He also suggests it'll be LinkedIn's primary growth driver in 2015. Harper also projects capital spending will range in the mid-to-low teens in terms of percentage of revenue over the next four-to-five years.
As a refresher, LinkedIn's fourth-quarter earnings results highlighted a 44% increase in revenue to $643 million and a jump in adjusted net income to $77 million from $48 million in the year-ago quarter. Both figures easily surpassed Wall Street's expectations.
Now what: The real question that should be asked here is whether or not LinkedIn has the capacity to make it to $300 per share, or higher according to CRT Capital.
My personal belief is that it is possible with momentum over the next few months, but over the intermediate-term (three-to-five years) I'm pretty skeptical of LinkedIn's valuation.
There's obviously a lot to like here if you're a current shareholder. The company's move into China, its Sales Navigator solution, and its rising engagement figures are all reasons why Foolish technology specialist Evan Niu singled out LinkedIn for its solid quarter last week. In addition, LinkedIn's acquisition of Bright has paid off in a big way, with 10 times as many active job listings at the end of 2014 as there were at the end of 2013. More job listings equals more eyeballs, and even more chance for LinkedIn to monetize these views.
But, there are other aspects which aren't as appealing. LinkedIn's valuation is one, with the company already trading at 42 times 2017's estimated EPS and with a PEG ratio of 2.2. Perhaps more worrisome is the fear of a spending ramp up if China or Europe continue to weaken. LinkedIn's growth rate may wind up slowing if this were to happen, and that might negatively affect its share price which has a lot of hope premium built into it.
While its shares are likely to ride high on its latest quarterly results, I'd suggest treading cautiously here as I'm struggling to find catalysts that could improve upon its current valuation.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of, and recommends LinkedIn and Apple. 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.