LinkedIn Stock: the Lone Pro in the Amateur-Hour Industry of Social Media

Facebook (FB) flak and its fallout is making LinkedIn (LNKD) look the grown-up on a popular playground, the rare social media company that understands the basic rules of etiquette required to win friends in the market. While Facebook, Groupon (GRPN), OpenTable (OPEN), Yelp (YELP) and others produced half-assed forecasts that led to disappointed investors, LinkedIn’s more solid grasp on its business and its prospects won it some real respect on Wall Street. Its shares are up some 40% so far this year, even with the sector dive Facebook caused.

LNKD Chart

LNKD data by YCharts

That gain looks even more impressive compared to several other newcomers to public trading from the social media industry. Groupon, Yelp, Zynga (ZNGA) and OpenTable are down 30% to more than 50% before their respective first day trading finishes. Facebook’s also down by double digits in its early days. Here's what they look like since people started really worrying in mid-March.

GRPN Chart

GRPN data by YCharts

LinkedIn’s core business, a Facebook-like website aimed at professionals, is free to users just like aspects of most of those recently-launched websites. But LinkedIn seems to have a better understanding of how to make money with such a freebie, and, just as importantly for investors, a handle on how much money it can reasonably expect. So far, the $10.1 billion market cap company has met or modestly beat analyst forecasts every quarter since its launch a year ago.

By contrast in recent weeks: Yelp produced a quarterly loss twice as big as it had forecast; Facebook overestimated its own worth at offering; OpenTable missed earnings forecasts by nearly 40%; Zynga beat forecasts but blew its credibility with an acquisition that looked like an impulse buy; and Groupon remembered enough refunds to require a truly depressing restatement. It’s been like watching amateur night at a high stakes poker game.

As an investment, LinkedIn carries many of the same risks of these other companies. Most LinkedIn members pay nothing for the service, and its revenues are somewhat reliant on selling advertising on the site. That’s been a hard-to-pin revenue stream for everyone, as corporations still question the value of ads in these spaces. General Motors (GM) didn’t help matters for any of these companies when it announcement recently that its Facebook ads weren’t worth even their relatively small cost.

However, most of LinkedIn’s revenues come from fees it charges companies for access to profile information for its members. Companies tend to view those members as potential customers or employees. This business arrangement has allowed LinkedIn, unlike most of its sector mates, to turn steadily profitable.

LNKD Revenues TTM Chart

LNKD Revenues TTM data by YCharts

LinkedIn also recently announced the acquisition of SlideShare, a website that allows users to upload PowerPoint and similar presentations for particular audiences. As a tool that job-seekers use to build resumes and companies use for marketing, recruiting and more, SlideShare is a product a whole lot of LinkedIn’s members already use. In other words, it’s an obvious fit.

LinkedIn’s performance so far has made some analysts more comfortable with the company. YCharts Pro gives LinkedIn strong marks for fundamentals, but the valuations on the shares are astronomical. Revenues are expected to grow more than 70% this year, and they’ll probably have to continue rampant growth for years to come to justify today’s share price. About half of the analysts that follow it are convinced that it will and recommend buying the shares. The other half gives them hold ratings.

LNKD Price / Sales Ratio Chart

LNKD Price / Sales Ratio data by YCharts

These kinds of valuations make LinkedIn more suited for high stakes growth investors accustomed to losing a lot of money on the way to hitting something big. One day, LinkedIn too will disappoint its investors with an unwelcome expenditure or a missed earnings result that will surely batter the share price. In fact, there’s some worry that earnings could come in a little low this quarter.

But there’s a difference between missing a mark and creating such disappointment that your forecasting looks no better than wishful guessing. The market routinely dishes out penalties for acceptable mistakes, and good companies recover from them. Most of the social media sector today fits within speculative territory. In a business where there’s already risk enough, LinkedIn’s track record of sensibility offers at least a little – just a little – peace of mind.

Dee Gill is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.

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