Should You Consider an Investment in LinkedIn?

With shares of LinkedIn (NYSE:LNKD) trading at around $176.54, is LNKD an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

LinkedIn has seen strong growth in almost every area. Q4 revenue was up 81 percent year-over-year. Talent Solutions revenue increased 90 percent, Marketing Solutions revenue increased 68 percent, and Premium Subscriptions revenue increased 79 percent. For 2012, revenue increased 86 percent over 2011. For 2013, LinkedIn expects revenue between $1.41 billion and $1.44 billion. For Q1, LinkedIn expects revenue between $305 million and $310 million.

LinkedIn now has approximately 202 million users. About 64 percent of these members are from foreign countries, which is a positive. If LinkedIn can grow globally as it has in the United States, then it will continue to see strong growth. LinkedIn’s current goals are to increase revenue, increase member count, and improve member engagement. LinkedIn has a specific game plan and is using new products and features to attain these goals. LinkedIn is also making Monster Worldwide (NYSE:MWW) look more like an ant than a monster. If there is a monster in regards to employment sites, it’s LinkedIn. In regards to the social networking environment, LinkedIn is at the top of the mountain looking down on everyone else when it comes to monetization. The key here is that LinkedIn doesn’t rely mostly on advertisements.

As far as website stats go, the past three months haven’t been so strong. According to Alexa.com, pageviews decreased 4.57 percent, pageviews per user decreased 3.71 percent, time on site decreased 2 percent, search decreased 3 percent, and bounce rate increased 3 percent. There are no positives here, but it’s a very short period of time and shouldn’t be overanalyzed. LinkedIn is the fourteenth most visited site in the world, and the eleventh most visited site in the United States.

Let’s take a look at some important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Strong  

The debt-to-equity ratio for LinkedIn is strong. The balance sheet is in excellent shape. Operating cash flow is $267.07 million. Levered free cash flow is $144.18 million.

Photo: http://wallstcheatsheet.com LinkedIn

T = Technicals on the Stock Chart Are Strong   

Over the past year, LinkedIn has outperformed the S&P 500, Facebook (NASDAQ:FB), and Monster Worldwide.

Photo: http://wallstcheatsheet.com/ LinkedIn

At $174.30, LinkedIn is currently trading above all its averages.

50-Day   SMA

129.72

100-Day   SMA

118.88

200-Day   SMA

112.62

E = Earnings Have Improved           

Earnings and revenue have consistently improved on an annual basis.

Photo: http://wallstcheatsheet.com LinkedIn

When we look at the last quarter on a year-over-year basis, we see an increase in revenue and earnings.

Photo: http://wallstcheatsheet.com/ LinkedIn

Now let’s take a look at the next page for the Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE or a STAY AWAY?

T = Trends Might Support the Industry

In regards to employment sites, LinkedIn has essentially taken over the industry. Therefore, unless something unexpected happens, trends will always favor LinkedIn. As far as social networking sites go, there is more excitement than substance at the moment, but LinkedIn doesn’t fall into this category anyway because it has figured out a way to monetize successfully. Another important note is that 30 percent of job viewers are now from mobile platforms. As mobile continues to grow, so will the number of Internet users, which will lead to more visits for LinkedIn. The biggest potential negative is a trend change in the stock market. Investors would flee LinkedIn at a rapid rate.

Conclusion

Up until this point, finding substantial negatives in this story would be nearly as challenging as finding millionaires living in Cabrini-Green in the 1970s. While the future is bright for the company, only positive news has been priced into the stock. This has led to the stock currently trading at 905 times earnings. That’s 1999-ish. The stock is also trading at 84 times forward earnings. It’s possible that insiders know the stock has gotten well ahead of itself, considering there has been consistent insider selling. In addition to that, there is a 7.30 percent short position on the stock. More than just insiders are well aware of the stock being too expensive. Another simple negative is weak margins.

It’s very possible that the stock will continue to climb higher for several months, perhaps even years, but it’s just creating its own bubble. For those who like to ride the wave, it might be a nice wave to catch as long as you bail at the right time. For those who want a long-term investment without having to worry, look for a slower and steadier wave.

LinkedIn is a WAIT AND SEE.

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