LinkedIn Corp (NYSE:LNKD) is by no means a value investment. The company is considered by some to be a great short opportunity, with decelerating growth and a massive valuation compared to fundamentals. Yet despite these facts, LinkedIn does in fact appear to be a value investment, when compared to another high-flying speculative name.
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.
Now, before everyone starts yelling, “You can’t compare a social networking site to a solar company,” I’d like to add that I know the two operate in different industries. However, neither are what you would call “traditional” in either technology or solar, and are vastly overvalued relative to each industry. Both trade as momentum stocks, and far exceed a valuation that is rationale compared to fundamentals. So, although I believe that LinkedIn is beyond overvalued compared to fundamentals; it actually ‘looks” cheap when you compare it to the valuation of SolarCity.
A Great Short Opportunity
When we look at SolarCity compared to LinkedIn Corp (NYSE:LNKD), you begin to realize that LinkedIn looks like a value investment. Aside from better growth and a more attractive valuation, LinkedIn is also profitable, with operating margins of 6.31%. On the other hand, SolarCity has operating margins of (53.52%). With that said, I think SolarCity makes for an incredible short opportunity. The stock has seen a bubble-like rally and is just around the corner from a large June 11 lockup expiration. While many retail investors are bullish and are excited about the immediate gains, I believe we will see smarter money (board members and executives) sell shares quite quickly, as any logical person can see how expensive this stock is trading.
The article This Stock Makes LinkedIn Look Cheap! originally appeared on Fool.com and is written by Brian Nichols.
Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends LinkedIn. The Motley Fool owns shares of LinkedIn. Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.