For many top social companies — such as Zynga (NASDAQ:ZNGA), Groupon (NASDAQ:GRPN) and Facebook (NASDAQ:FB) — their post-IPO performances have been horrific. Yet one has avoided the carnage: LinkedIn (NASDAQ:LNKD). About a year ago, the company came public at $45 a share. As of now, the stock is at about $94. And that’s even after getting embarrassed on Wednesday when it was revealed the company had some 6.5 million users’ passwords hacked and published on the Internet.
However, the stock has faced weakness lately. Since early May, it’s off about 20%.
O.K., so should you buy LinkedIn stock — or is it vulnerable to more selling pressure? To decide, let’s take a look at the pros and cons:
Pros
Leading Social Brand for Business: LinkedIn has over 161 million members in more than 200 countries and territories. What’s more, the platform has executives from all the Fortune 500, and more than 2 million companies have profile pages.
During the first quarter of 2012, LinkedIn attracted 102.5 million unique visitors and 9.4 billion page views.
Powerful Business Model: LinkedIn has been able to effectively monetize its valuable user base. For example, the company has three revenues sources: Hiring Solutions, Marketing and Premium Memberships. But so far, the biggest source of growth has come from Hiring Solutions. All in all, LinkedIn is a great tool for recruiting top talent.
In the latest quarter, revenues spiked by 101% to $188.5 million. It was the seventh straight quarter that revenues at least doubled.
Innovation. To keep its edge, LinkedIn continues to launch interesting products. Some examples include customer relationship management (CRM) integrations with Salesforce.com (NYSE:CRM) as well as a new mobile app for the Apple’s (NASDAQ:AAPL) iPad.
LinkedIn has also used its strong cash position and hefty market cap to strike acquisitions. One of the latest was for Slideshare, which allows users to upload presentations.
Cons
Competition. LinkedIn’s huge success is attracting rivals. One is Salesforce.com, which operates Data.com.
But perhaps the biggest threat is BranchOut, which leverages the Facebook platform. BranchOut has experienced explosive growth, with the user base going from 10 million in February to 25 million by April. About three new members are joining every second.
Security. Yesterday’s report about hacked passwords — which LinkedIn has confirmed, saying that “some” were stolen — is a serious blow. Beyond the sheer numbers involved, what’s even worse is that it appears that LinkedIn uses outdated security algorithms.
For a site that focuses on business users, this does raise some doubts about the company’s infrastructure platform. Might there be other vulnerabilities?
Valuation. Even with the recent correction in the stock price, LinkedIn is still selling at a frothy valuation. It currently trades at 15 times sales and a whopping 637 times earnings. Essentially, Wall Street expects that the tremendous growth will continue for some time.
Verdict
Investors tend to underestimate potential competition. In fact, the threats can be even more severe in hot tech categories. In other words, BranchOut’s rocket growth should be an alarm. If the momentum continues, the company will be a worthy competitor to LinkedIn.
Besides, it’s going to be extremely difficult for LinkedIn to maintain its doubling of revenues. So when that pace slows down, it’s likely to rattle investors. And given the already significant valuation, the stock could be vulnerable to a plunge. Thus, the cons outweigh the pros on the stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”, “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.
