When it comes to social networking, no one gets excited about LinkedIn (NYSE:LNKD). Facebook (NASDAQ:FB) connects you to your friends and lets you post goofy cat videos, Zynga (NASDAQ:ZNGA) brings you games, and Pandora (NYSE:P) lets you listen to any kind of music you want.
LinkedIn? Not that job hunting isn’t important — it is — but it doesn’t carry nearly the same emotional cache as the rest.
Luckily for LNKD, all that means nothing to investors. They want growth, and LinkedIn has delivered, resulting in roughly 160% growth from its May 2011 IPO pricing and 25% gains after its first-day pop.
There seems to be no end to the momentum. Just yesterday, an analyst from Jefferies (NYSE:JEF) put out a bullish report on the company — issuing a price target of $142 for shares that then were at $108 — that drove LNKD stock up about 6%.
Jefferies points out that LinkedIn has an asset that would be incredibly difficult to replicate: a database of 174 million members. (And fun fact: Two new members join every second!) And because LinkedIn is, in a way, replacing the traditional resume, many of those members feel the need to maintain their profiles on a frequent basis.
LinkedIn has been smart in its aggression toward solving monetization. To this end, LinkedIn has three core revenues streams: Hiring Solutions, Marketing and Premium Memberships. The big growth driver is the Hiring Solutions component, which involves getting fees from companies to recruit high-level employees. According to Jeffries, LNKD should boost its revenues from $522 million in 2012 to $1.8 billion in 2014.
That all sounds great, but LinkedIn isn’t all rainbows.
LinkedIn’s valuation is — and even assuming Jeffries’ growth projections are correct, still will be — hefty. The company’s price-to-sales ratio would be nearly 7X, whereas mature Internet companies like Google (NASDAQ:GOOG) and Yahoo! (NASDAQ:YHOO) trade at multiples of 5X and 4X, respectively. And its price-to-earnings ratio now clocks in at more than four digits, making even Amazon (NASDAQ:AMZN) look like a bargain in that respect.
Plus, sell-side analysts like Jefferies tend to get overenthusiastic about their projections. One thing that could rain on LinkedIn’s parade would be gains in traction of Branchout and/or other competitors — that certainly would weigh on growth.
While LinkedIn is in an enviable position, sitting on its core and playing rope-a-dope just won’t do. Instead, the company should get serious about acquisitions. With a highly valued stock, LinkedIn can buy assets fairly cheaply, and the company also has $617 million in the bank to work with.
Monster Worldwide would add about $1 billion in revenues, and is more attractive as it takes action to cut costs and streamline operations. But it also has some key assets. Monster has a strong European footprint, and its sales organization is extensive. MWW has contracts with businesses of all sizes as well as government agencies, educational institutions and advertising agencies.
LinkedIn has pulled off some acquisitions during the past couple years, though they have been on the smaller side; the company instead seems to be focused on internal development. However, if LNKD wants to keep up its growth rate, it should rethink its strategy and strike a deal while its stock is still hot. As Salesforce.com (NYSE:CRM) and other long-term growth companies can tell you, dealmaking can be critical.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.