Registered: Apr 2010
07-26-12 05:17 PM
In light of Zynga Inc. (ZNGA)’s utter failure today, investors are starting to look a little more carefully at the social media area. Facebook is down nearly 5% ahead of earnings tonight, and currently trading more than 25% below its original offering price.
ZNGA by the way is now valued at less than a third of its December IPO Price – OUCH!
LinkedIn Corporation (LNKD) is one of the more successful social media IPOs of the last 18 months – currently trading at more than twice the initial offering price.
LNKD has a profitable business model, a strong and growing customer base, and investors who believe in the perpetual growth opportunity…
And that’s the problem: trees don’t grow to the sky and the chances of LNKD growing into its premium stock price in the even not-so-near future are horrible.
LinkedIn is currently trading at nearly 150 times estimated earnings for this year – and 83 times earnings expectations that are a full 18 months away. The price to sales ratio is just as alarming – with LNKD trading at 11.5x this year’s expected revenue – and 7.75 times next year’s revenue estimates.
Imagine what happens if those estimates are lowered... (!!)
In growth markets, PE analytics just don’t matter. Investors buy based on the story – not based on the valuation. But in an environment where managers are reducing risk, valuations matter very much. LNKD represent s much more risk, and is a potential liquidation candidate – or at the very least “reduce” candidate - for institutional managers.
Today, institutional managers are only reluctantly reducing risk. But in the event of a major market dislocation (say from a poor reaction to Facebook’s earnings tonight – disturbing news from Europe – another disappointing economic piece from China – or disappointment when the Fed decides NOT to embark on QE3) – managers will have to reduce risk quickly.
A large allocation to LNKD represents the exact kind of position that managers can kick out quickly to raise capital and reduce their VAR…
Breakdown Comes in Stages
LNKD has maintained its premium valuation because it’s a Wall Street darling and a favorite retail investor holding as well. Dips have been bought as investors take advantage of discount pricing.
In May, the stock broke to a new high (save the opening spike from the first day of trading), but couldn’t hold that level. In June, it absorbed the buy orders from discount buyers and established a support level.
But given the increasingly precarious state of the overall market – and the potential for both retail and professional investors to lighten up on risk – LNKD looks particularly vulnerable.
Facebook’s earnings this afternoon could certainly trigger a selloff – but the bigger opportunity will likely come from a macro shift away from high-value growth assets.
LNKD reports on August 2. Analysts are looking for earnings of $0.16 on revenues of $216 million. On the positive side, LNKD could benefit from poor employment (more users upgrading to premium accounts in an attempt to network and find a new job).
But given the overly bullish sentiment and the nosebleed multiple, the chance of disappointment is very high. LNKD is going to have to be extremely impressive (quarter after quarter) just to maintain – not to mention advancing further.