Why LNKD will be a good buy…one day.

written by melissaburnell on May 20, 2011 in Opinions and Under The Radar with no comments
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I’m going to start this article with a disclaimer. I am not a financial expert. I’m not even a financial expert wannabe. I have never bought or sold stock. In fact, I changed my major in college to avoid taking Economics. I am, however, a seasoned researcher who spent a couple hours finding the best and most balanced articles before coming to a conclusion about whether or not to buy LinkedIn stock. After all, LinkedIn is the guinea pig in the trend of social network IPOs. This is my conclusion. (This does not necessarily reflect the opinion of anyone else at Dealmaker Media)

In anticipation of the LinkedIn IPO, I read articles on a ton of sites like The Motley Fool and Dealbook, even a question about LinkedIn stock posted on LinkedIn. I just wanted to know a brief history of dot com IPO prices, secondary market debuts, and their trends over the next few months. Since, I’m new to this world, very little made sense to me, mostly because of finance jargon I’m not familiar with. I’m happy to say I can now talk about P/E Ratios with some confidence.

I really want LinkedIn stock and I’ll probably buy some down the road. Earlier in the week, I was frantically trying to log in to my Ameritrade account (yes I have one, no I don’t have any stock, and there is only about $35 in the account anyway – long story). I wanted to see how I could get some money in, how one goes about buying stock, and when my buy would go through. I figured at $45 IPO, it would go up a bit and then I could buy 10-20 shares. Just for kicks. I knew I wouldn’t be able to retire off the long term earnings. However, as someone who entered the workforce during the first dot com explosion, I figured it was time I participate in this side of the business. While I look forward to buying some LinkedIn stock, I’m going to wait a few months – after the bandwagon gets a little less crowded.

Grossly over-valued companies aren’t anything new lately, and stock options mean nothing for most people until the IPO hits. A lot of people became millionaires yesterday and some institutional investors made even more, but again it means nothing right now to most of us. This stock is so hot and people want it so badly that they’re willing to pay top dollar.

I do think that LinkedIn has a solid future and even if most of its 100 million users aren’t using the service daily, it’s irrefutable that their traffic and impact are impressive. Most importantly, its advertising model is solid; it just lacks the volume of Google and Facebook and it will never be Google or Facebook. However, it has a reputable future with solid earnings coming in time. It’s basic math. Stock prices follow revenue. When there is no revenue (or very little), stock goes down.  When LinkedIn uses the billions it just made to ramp up its advertising platform, it will go back up. Owning LinkedIn stock is an excellent thing, but unless you were able to grab it at $45, you got in at around $95 and overpaid. In the long run it will be a good investment, but buying the stock at $50 in a few months is better.

If LinkedIn stock doesn’t settle down to a figure that reflects its earnings, then we’ve reached bubble status.  At which point, you can best believe wannabe individual investors like me won’t even be able to see the corner of a share of Facebook from the bleachers a couple miles down the road from Wall Street.

Only time will tell what lessons can be learned from watching the first major dot com IPO in sometime, and the first social network IPO ever. If history has shown us anything, it’s that revenues are the most important part of a stock’s value. Do you think LinkedIn has the potential to earn what even half of what it needs to earn its valuation? Now that LinkedIn has launched and doubled its IPO rate, what’s next? Where do you think it will be in 6 months?

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