Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Is LinkedIn Today’s Most Overvalued Stock?

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LinkedIn (NYSE: LNKD) might just be the most overvalued stock around these days. On December 11, 2015, LinkedIn was trading at $230.61 a share, yet it reported a negative net income of -$147.82 million on September 30, 2015.

That loss was only one of a slew of horrible financial numbers at the social media company. Some other dismal figures generated by LinkedIn’s third quarter performance include the following:

Linkedin_infographic

  • An diluted earnings per share figure of -1.156
  • A negative profit margin of -5.2%
  • No dividends
  • A free cash flow of $72.94 million
  • A return on equity figure of -4.05%
  • $3.098 billion in cash and short-term investments
  • $760.8 million in cash from operations

Does LinkedIn Make Money?

Now for the strangest and most troubling aspect of LinkedIn’s financials, which tells us that LinkedIn does not make money. The company’s revenue has been growing at an impressive rate even as its net income keeps falling dramatically.

Lunk

In September 2013 LinkedIn reported a TTM revenue of $1.38 billion, which grew to $2.023 billion in September 2014 and $2.772 billion in September 2015. That looks rather impressive until one takes a look at LinkedIn’s net income and realizes that the company is losing money even as its revenue is growing.

In September 2013 LinkedIn reported a net income of $34.49 million, by September 2014 its net income had fallen to -$14.96 million and in September 2015 its net income was -$147.82 million. LinkedIn’s losses in 2014 appear to be 10 times what they were just a year earlier.

These revenues look like the opposite of float; instead of boosting the company, they seem to be driving it down. One has to wonder how long such losses can go on before the company falls into a death spiral.

Could LinkedIn Ever Make Money?

Such numbers will have investors asking the question: Can social media companies make money, and if so, can LinkedIn? The interesting answer to these question is yes, social media companies can make money.

Facebook (NASDAQ: FB) makes a lot of it. The social network reported a net income of $2.828 billion on September 30, 2015. Unlike LinkedIn, Facebook has seen significant income growth over the past two years.

Facebook reported a net income of $1.0141 billion in September 2013 that grew to $2.762 billion in September 2014 and $2.828 billion September 2015. Facebook is making a lot of money, which proves that social media can be a very lucrative business if it is done right.

Facebook also has a lot of float. It reported $7.355 billion in cash from operations on September 30, 2015, an increase of $2.25 billion over September 2014 when it reported $5.105 billion in cash from operations. Mark Zuckerberg has figured out how to make a lot of float from social media and to grow that float dramatically.

LinkedIn simply has no float, so it loses money—a lot of it. That would indicate a deeply flawed business model, much like that at Twitter (NYSE: TWTR). Companies like LinkedIn and Twitter have become the opposite of a value investment, generating meaningless revenue while losing money like mad.

If there is one stock investors need to stay away from these days, it is LinkedIn. Nothing in this stock’s financial numbers justifies its values. Instead, they scream “bubble,” which is about to be deflated at some point.

Why Investors Should Buy Facebook and Stay Away from LinkedIn—Far Away

My prediction is that LinkedIn will collapse and probably get acquired at some point. The only way that solutions like LinkedIn and Twitter could survive is as part of a larger organization such as Facebook.

The only thing protecting LinkedIn from acquisition is its grossly overinflated stock price. If that collapses, there is no way LinkedIn could survive as an independent company. LinkedIn proves that there is only one good social media stock, and that is Facebook.

Smart investors need to put Facebook in their portfolios and stay as far away from LinkedIn as possible. This stock is headed for a very big fall and soon.