Tuesday, May 22, 2012

Linked-In the next Facebook to Splat?

Linked-In's P/E ratio makes Facebook look like a swell investment.

Linked-In is one of those annoying Social Media sites that nags you with endless e-mail messages.  Are you on Linked-In?  Have you updated your profile?  Five people have asked to link to you - and you know three of them!

It has some value, I guess, and my unemployed friends like to squander endless hours on it, trying to build up virtual credentials.  But here's the thing:  The only people you are impressing on Linked-In are other underemployed or unemployed people like yourself.   And the puffed-up resumes we put on Linked-In aren't impressing anyone.

The stock price of Linked-In is shocking.   At $104 a share, it has a staggering P/E ratio of over 600.  This is in contrast to Facebook's merely shitty ratio of 122.   What is going on here?  Is Linked-In going places we don't know about?  What has caused the share price to nearly double in the last few months?

Well, a few well-planted stories in the media are hyping the stock.   Again, as with Facebook, we are told about the legions of "active users" of this business/social media site.  But again, they count me as an "active user" when I log onto the site less than once a month.   And when I do, I don't do much, other than look at all the people who are trying to "link" to me, and wonder why.

The big news recently are the rumors about a possible Monster.com buyout.  We are told that Monster.com is how everyone gets a job these days, and Linked-In is going to combine its business networking with job postings and "lock up" the job market!  Surely this has to be worth trillions!

While this may be a good thing for Linked-In, it is hard to tell ow much of a good thing it is.   But even assuming the rumors are true, that Linked-In can buy Monster for a good price, and they end up being the "go to" place for job listings and applications, what does this mean for the stock price?

At a P/E ratio of 600, they are about 30 times that of Google or Apple, both of which have fairly high P/E ratios of around 20.  Even Monster.com has a P/E ratio of 18.  This means one of two possible things.  First, Linked-In has to increase profits by a factor of 30.  Second, the stock needs to drop by a factor of 30.   Which do you think is more probable?

While I can envision a scenario where Linked-In comes out on top with this - and becomes the Amazon.com of job postings, I am not sure that the revenue model will support a 30x increase in revenues.   If they try to raise prices, people will list jobs elsewhere (and people with jobs to list are in the catbird seat, these days, as opposed to job-seekers).

I think the end result will be a little of both.  Their revenues may climb, but not by 30x.  Suppose they increase revenues by a factor of 10?  That still leaves the stock overpriced by a factor of three.   You can play with the numbers anyway you want to, but it still comes down to a radically overvalued stock.

And speaking of Monster, why is it they seem so eager to be bought out?  With a P/E ratio of 18 (47 cents per share earnings at about $9 a share) it seems that the company is doing well.   But perhaps the insiders, having stock options at $10 or $15 a share, want to be "bought out" so they can "cash in".   The company is a long way from the days of $80 a share (just before the crash in 2002), to be sure.  But it appears to be making money - why not just keep it?   Again, that makes no sense, if you are an insider and own a lot of shares, and want to cash out.

Which illustrates, by the way, why it pays to never be a minority shareholder in a large company.  When you and your ilk buy 5% of Facebook, it really means nothing to the guy who owns 57%.  And the guy who owns 57% is calling the shots - not you.

So, maybe that explains why Monster is so eager to sell.   But the question remains, does buying a company with a one billion market cap and a P/E ratio of 18 suddenly make Linked-In's P/E ratio of 600 make sense?

It doesn't to me.  And it never pays to invest in things you don't understand.