LinkedIn: Not Cheap By Any Means
LinkedIn Corp (NYSE:LNKD) is controversial, as investors debate whether or not upside could possibly exist from its inflated price. The stock has returned a mind boggling 96% since its IPO; an IPO where the company saw its stock trade with a premium of more than 60% throughout most of the day. Thus the company has always been given the benefit of the doubt, and has become the quintessential example of a momentum stock in the internet space.
LinkedIn Corp (NYSE:LNKD) trades at a whopping 18 times sales and at 87.25 times earnings. Just so you know, the S&P 500 trades at 1.51 times sales and at 18 times “current” earnings. Google trades at just 5.60 times sales with a P/E ratio of 27.20, and Facebook (often compared) trades at 11.50 times sales at 34 times next year’s earnings. Thus LinkedIn is very expensive, as stocks “never” maintain such large premiums to fundamentals for long periods of time.
For a five year period Google traded flat despite market leading growth. It traded flat because the stock depreciated to a level where fundamentals were more accurately measured against its valuation. Sooner or later all momentum stocks will align with fundamentals, whether it be years of flat trading and growing fundamentals, one-year of large loss despite growing fundamentals, or many years of fundamental growth that greatly outperforms stock performance; the end result is inevitable.
With LinkedIn Corp (NYSE:LNKD) in particular, I currently believe it will soon see its heyday come to an end. The company is valued on massive top-line growth; however, that growth is already decelerating. During its last quarter the company saw growth of 72.30%, compared to growth of 86% in 2012, and 115% in 2011. As you can see, this is not a favorable trend, as it’s starting to appear as though the “employment market” is not quite as large as many had believed, and LinkedIn may be reaching a bit of a peak.
A Valuation Beyond Explanation
While LinkedIn Corp (NYSE:LNKD) looks grossly overvalued, it looks cheap compared to SolarCity Corp (NASDAQ:SCTY), a stock that is higher by 280% since its IPO. This stock has rallied 133% in the last month alone, and continues to defy logic. This is a company that works in the solar equipment installation business, as a major supplier for Tesla.
One thing that all momentum stocks have in common is explosive growth. For a short period of time, the growth creates reason in the minds of investors. But with SolarCity Corp (NASDAQ:SCTY), it posted growth of just 22% last quarter, much less than LinkedIn, and much of its growth is speculative, assuming future growth in solar. Yet despite this questionable future and the mediocre growth, SolarCity Corp (NASDAQ:SCTY) trades at an incredible 25 times sales! In my opinion, there is no way to explain this valuation, a premium to LinkedIn with much slower sales growth.
