A Realistic Valuation of LinkedIn (LNKD)

It turns out all you need to do to get your stock to rally 15% in 2 weeks is to have your site hacked and 6.5 million passwords stolen and posted on the internets.

Really, who is buying here?

LinkedIn just got slapped with a $5M lawsuit. That doesn't sound like much for a company that has $620m in cash on hand, and had revenue of $616m in the last year. However, the $11b market-cap company only had net income of $17m in the past year.

What Wall Street cares about is quarterly EPS. LinkedIN is going to have a hard time meeting-or-beating EPS expectations when their litigation costs are about to go through the roof.

So what's a realistic valuation of LNKD?

With a P/E of 657 and a forward P/E of 88.46, the answer is much, much lower. Look at an industry peer, Trip Advisor (TRIP), for example. Half the market cap, same levels of revenue, higher profits, and a P/E of just 32. This is right around what we think LNKD should be valued at.

Share price would literally need to be cut in half for that to happen. But will it?

It just might. LNKD currently has 85% institutional ownership, which is helping to prop up the current lofty share price. In spite of that, it only takes one of the big boys to run for the exit, and they will all start unloading shares like rats jumping from a sinking ship.

Mastery Bottom Line:

You're off your rocker if you're investing in LinkedIn at these levels. We say short it down to $60 and re-evaluate whether or not it is a good investment on the long side at that point.

Disclaimer: No current positions in LNKD, but may initiate a position in the future depending on market conditions.