LinkedIn Corp (LNKD), Facebook Inc (FB): Why the Most Overvalued Social Network Stock Keeps Growing

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LinkedIn Corp (NYSE:LNKD)LinkedIn Corp (NYSE:LNKD) is severely overvalued. With a $26 billion market capitalization, it’s equivalent to more than five times the value of Blackberry, 18 times the value of China’s biggest social network Renren Inc (NYSE:RENN) or roughly one-third of Facebook Inc (NASDAQ:FB)‘s market capitalization — quite astonishing considering Facebook Inc (NASDAQ:FB) has more than 1 billion users while LinkedIn Corp (NYSE:LNKD) has just 238 million.

Even after acknowledging its strong monetization system, LinkedIn Corp (NYSE:LNKD)’s current 672 P/E ratio doesn’t look healthy or sustainable to me. Yet, the stock price keeps rising like there’s no tomorrow. What is causing this overvaluation and could this be a disaster in the making or just another growth IT stock?

Super overvalued or high growth stock?

With the P/E ratio approaching 700 and the stock price at its all-time high, LinkedIn is clearly overvalued. The question is: can it grow enough to support such a huge P/E metric in an increasingly fierce market where competitor Viadeo, with already more than 50 million members worldwide, is already stronger than LinkedIn in emerging economies?

The recent 10.6% price increased was caused because LinkedIn Corp (NYSE:LNKD) managed to beat the Street EPS consensus by $0.03 earnings $0.07 per share, causing  the stock to reach a new all-time high, making the stock even more expensive. Truth be told, the second-quarter earnings were quite positive, showing a 33% increase in earnings due to record membership rolls. What does not seem rational is the market’s overreaction to a stock that was already overvalued.

In early May, LinkedIn Corp (NYSE:LNKD) gave a poor weak growth forecast, causing shares to fall more than 10% in after-hours trading despite posting relatively robust first-quarter results. The weak forecast given in the first quarter caused most sell-side analysts to reconsider their price targets. The upside was that by guiding weak guidance, LinkedIn actually lowered the high expectations of the Street and prepared the road for beating the new estimates in the second quarter. And that’s actually what happened last week!

But now expectations are high again. The third quarter is going to be even more difficult to deal with, and considering the astronomical P/E ratio, it’s wise to expect a price correction after the next earnings are released in three months.

LinkedIn: The place where you put your CV online or the hub for all professional activity carried online?

The current market valuation is not sustainable simply because, to support it, we would need to assume an extremely high annual growth rate of users, in the 30%-range, for the next five years. In other words, this implies transforming LinkedIn from its current state into a massive global hub for all kinds of professional activities from software engineering to medicine.

I doubt that will materialize, as users seem to see LinkedIn Corp (NYSE:LNKD) as the place where they can put their CV online, but not where most of their professional activity is being done. Instead, professionals tend to group themselves into smaller, more elitist platforms. Software engineers use, Financial professionals register at SumZero, is for researchers, RePEC for economists, DeviantArt and Basecamp for designers, Proformative for accounting, Doximity for medicine and so on. Apart from the groups feature, LinkedIn is doing nothing to stop this trend.

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