While the stocks of social media companies like Facebook (NASDAQ:FB), Zynga (NASDAQ:ZNGA) and Groupon (NASDAQ:GRPN) sustained big losses in 2012, LinkedIn (NYSE:LNKD) bucked the trend. Its shares posted a gain of 72%.
Then again, LinkedIn keeps finding ways to maintain its heady growth rate. In the latest quarter, revenues spiked by 81% to $252 million, and net income came to $2.3 million, up from a loss of $1.6 million in the same period a year before.
Can LinkedIn shares keep up the momentum? Or could it hit some headwinds ahead? To see, let’s take a look at the pros and cons:
Pros
The Social Destination for Business. The LinkedIn brand is powerful, with a global user base of 187 million (two-thirds from outside the U.S.). Every second, two people sign up for membership to the service.
No doubt, it would be extremely difficult for a rival start-up to cost-effectively build a similar user base.
Business Model. LinkedIn has three core sources of revenues: Hiring Solutions, Marketing and Premium Memberships. The Hiring Solutions business continues to be the key money-maker because employers have found LinkedIn to be an effective way to recruit white-collar workers. The company has roughly 4,500 enterprise customers.
Innovation. LinkedIn continues to invest heavily in its platform. Part of this has been through acquisitions, such as with the deal for Slideshare, which lets users upload presentations.
But LinkedIn has also organically built various technologies. These include apps for Apple’s (NASDAQ:AAPL) iPhone and Google’s (NASDAQ:GOOG) Android; new profile templates for company pages; and endorsements (since their launch in September, more than 200 million endorsements have been made between members).
Cons
Competition. While LinkedIn has a powerful platform, potential threats do lurk. Companies like Salesforce.com (NYSE:CRM) are encroaching on LinkedIn’s turf. Several others, like Facebook, are also leveraging existing platforms to take on LinkedIn. Additional examples include BranchOut and TweetMyJobs.
Growth Ramp. It’s inevitable that the growth rate will slowdown. As the revenue base gets larger, LinkedIn will probably need to look at getting more aggressive with acquisitions, which can definitely be risky.
Valuation. It’s at nosebleed levels. Consider that LinkedIn trades at a price-to-earnings ratio of 712!
Just a few days ago, an analyst from Barclays (NYSE:BCS) put out a cautious report on the shares because of the valuation. It pointed out that the Street’s 2013 revenue forecast is about 8% higher than LinkedIn’s own.
Verdict
Even while some competition has emerged, LinkedIn still has a strong moat. The company also has been smart in building multiple revenue streams, all which are in the high-growth mode.
But the problem remains the valuation. If the growth rate decelerates — which could easily happen within the next year or so — the stock could be vulnerable.
Thus, the cons outweigh the pros on the stock for now.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
