LinkedIn (LNKD) is just too high. It’s always too high, and those who are in it almost certainly paid too much. And then the stock goes higher.
Right now the stock sells for around 79 times earnings. That’s reasonable when profits are growing 80% or more, but LNKD has been putting out some slower growth lately. Look at the quarterly profit growth along the bottom of the One Year Chart. 2014 earnings are expected to grow 20%, and those got cut 4 qtrs ago.
Analysts think this company can grow profits over the long-term at 40% a year. LNKD was growing much faster than that. then 2014 came and the stock has done admirably well considering the meh profit growth.
One Year Chart
I wish I would have gotten us in at $150, but the stock was selling for — wait for it — 90 times earnings. That’s 90 years worth of profits if profits stay the same. But investors feel someday LNKD can make much more money, that’s why the stock’s high.
The risk is if the stock market comes down these high P/E stocks could get crushed. If LNKD came down in a correction — one caused by serious economic concerns — then 50x earnings would be a reasonable low point. That’s $137 a share. If I get us in here at around $215, then I’m taking a risk. I need to be more prudent with client funds.
Fair Value
I still think LNKD deserves a high P/E, and 60 is high. Revenues are expected to grow from a little-more-than $2 billion in 2014 to a little-less-than $3 billion this year. This is a big company, with difference divisions producing revenue, it deserves a high valuation. Still, the stock’s overvalued by 24% in my opinion.
Sharek’s Take
LinkedIn is always too-high-to-buy but that hasn’t stopped it from going higher. Still, I feel someday the stock will come down to a more reasonable level, and the cause of this could be a stock market correction or the company lowering earnings estimates. By the way LNKD lowered estimates four quarters ago when it reported earnings on February 6th 2014. As you can see from the One Year Chart, that was the start of a decline. LinkedIn is set to report earnings February 5th, and I’ll be curios to see what the stock does. For now I hold off on buying LNKD, but the stock is high on my radar, as it always is.
View the Earnings Table here. View the Profit History here.View the Ten Year Chart here.
