Why am I recommending LinkedIn (NYSE:LNKD) as a short play or as a stock to sell? After all, its estimated earnings growth rate for the next three years is supposed to be around 33%. Moreover, its revenues are growing, and it’s getting a lot of positive buzz.
Well, as the old saying goes, buy on bad news, sell on good news. There’s definitely a lot of good news surrounding LinkedIn and a whole lot more of buzz and hype. As I’ve written earlier, if you really strip down LinkedIn, it’s just an advertising platform. It has a niche audience and has a very lucrative advertiser niche. The human resources and manpower sectors pay decent money for highly targeted recruitment ad placements. LinkedIn has solid revenues because of its niche specialty. As solid as these numbers may be, they don’t take away from the fact that LinkedIn is a content play. It has some social networking bells and whistles but at the end of the day, it’s a content play and infomediary.
Considering these factors, it’s very hard for it to justify its 89 price to earnings ratio. Think about that—89! That’s how overvalued this company is. You have to understand that it only takes a nasty market correction to vaporize the advertiser appeal of LinkedIn. If the market tanks, and companies are laying off people instead of looking to hire people, there goes a huge bulk of the advertising base of LinkedIn.
While it would be a great buy at a lower PE ratio, at 89, you’re basically just buying on the hype. You’re buying the stock at the top. I wouldn’t be surprised if it appreciates some more after this blog post but keep in mind that the higher it goes, the tougher any ensuing crash back to earth would be. Its recent sky-high pricing reminds me of the first wave of dot-com companies. While LinkedIn, unlike most of those first wave Internet companies, is actually making money, it is more vulnerable than it appears. Proceed with caution
