Forget Facebook: Own this social media stock
While FB shares have struggled to reclaim their IPO price, LinkedIn's have more than doubled this year alone.
This trend crosses all boundaries: personal, business, class and even international.
While it is built upon the basic principles of human collaboration and friendship, this trend has been supercharged by the connective power of the Internet.
I am talking about networking.
Before the Internet, individuals had no choice but to meet face-to-face. This often restricted interaction to geographic locations and ingrained habit.
Sites like Facebook (FB) changed all that. And there is another social media opportunity that beats out even Facebook. I'm going to tell you all about it. But first, I want to share with you my foray into social media.
I consider myself tech-savvy and an early adopter. However, my first real exposure to the new networking trend left me a little embarrassed.
I had just finished lunch with a friend from the University of Pennsylvania. When we parted, he asked if I was on Facebook. "Facebook? What the heck is that?" I asked.
Remember, this was back when Facebook was exclusively for Ivy League universities. He explained that it was a great networking site for college students and others.
My friend pointed out that Facebook was more exclusive than Myspace or Friendster and required a ".edu" email to join.
"Not only that, but it's going to soon expand to everyone and make the greatest stock investment ever," he said. What he didn't know was that there would be an even greater opportunity down the road. What is it? Well, it's none other than LinkedIn (LNKD).
Unlike Facebook, which mostly concentrates on the social purpose for the end user, LinkedIn is focused on professional/business networking -- with the socializing aspect as a secondary function.
Founded in 2002 in co-founder Reid Hoffman's living room, the company has rapidly expanded into a leading social media company. Boasting more than a quarter-billion members, with 65% outside of the United States, LinkedIn is the largest professional network in the world. Job seekers, deal makers, business owners and all strata of management/worker positions are represented. In fact, new users are flocking to the site at a rate of two per second, according to company data.
This growth has recently sparked heavy investor interest in the shares. The stock price has exploded by more than 400% since 2010, doubling in value during 2013 alone. Unlike Facebook, which disappointed investors with its IPO, LinkedIn is making its investors wealthy. Here's why.
Revenues at Facebook are primarily derived from advertising. This makes the company vulnerable to the success of its advertisers. No one is going to continue marketing in a manner that doesn't produce returns.
LinkedIn relies on a more diversified revenue model that consists of approximately 30% advertiser, 35% premium subscription, and 35% job listings. This revenue diversification provides LinkedIn more "staying power" than a primary advertising-funded model.
Facebook boasts an incredible 1.11 billion monthly users, which dwarfs LinkedIn's membership. Despite the size difference, the upwardly mobile professional user base of LinkedIn creates a more powerful marketing platform than Facebook's younger audience.
LinkedIn is developing a stable of "influencers." This program consists of 300 influential high-profile users of the network, such as President Barack Obama and Bill Gates. These influencers are able to syndicate their posts for increased exposure. The goal is to create an informational hub and publishing platform for original content, while adding value for the site's users.
These improvements create what's called "stickiness" in Internet parlance. Stickiness is what keeps users coming back for fresh content, rather than changing to another site.
Taking a look at the second-quarter performance of the company reveals a near 60% revenue increase year over year, net income of $3.7 million compared to $2.8 million for the same time last year and a 37% increase in membership growth.
Add these advantages to the 60% annual analysts' earnings growth projection over the next five years and it adds up to a lucrative investment opportunity.
Risks to consider: While the diversification of LinkedIn mitigates many of the threats facing other social networks such as Facebook, risks still remain. The company remains valued on its future growth prospects. It needs to continue its rapid growth to maintain high investor interest. Investing in Linkedin right now is a bet on its continual growth.
Action to take: Buying shares now based on the upward momentum makes solid technical sense. However, shares are very expensive at more than $241. My target price is $330 within the next 12 months. This creates an opportunity for option leaps.
Leaps are long-term options that cost much less than the shares themselves and provide the leverage required to participate in the stock's bullish move without tying up the capital required to buy the shares directly. Just like regular options, one leap is equivalent to 100 shares. Presently, I like the January 2015 $300 strike price leaps, which are selling at $27.50 right now. Substantial profits can be made if shares of LinkedIn move above $300 by the expiration date in January 2015.
David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.
More from StreetAuthority
Now, tech stocks are different - I'd buy and hold some.
Except frikken Cisco. Hopefully innovative engineers are working on new technologies to replace stupid CEOs who would lay off a bunch of workers when their company is beating estimates just because they might have smelled a global economic fart.
The problem with "Cisco thinking" is they're creating more global economic gassy-ness among short-sighted CEOs. I hope they all *pop*.
Of all of the social media sites, I guess LinkedIn might be the safest, but I wouldn't invest in it myself.
And FB would have been an awesome buy when it was at its lowest - just to sell at its recent peak.
What justification do you use to arrive at your $330 price target? Or is that just a nice number you picked out of the air? While LNKD has had impressive growth, I would not want to be a shareholder when they have their first disappointment! Selling at about 18 times annualized SALES, and 652 times estimated 2013 EPS, the stock is priced for perfection!
At the first sign of slowing revenue growth, the momentum buyers will head for the exits and holders will learn the meaning of the term "air pocket"!
I will give you credit in that in the article you do point out the stock is expensive. However, I would add the adjective ridiculously expensive! Buying stocks after they have more than doubled and have NO valuation underpinnings is a very, very risky way to try and achieve investment success.
Speaking of social media, do you note the trend to continue misusing language
for the benefit of making a quick profit?
In the late Fifties-Early-Sixties we went to see movies (television hadn't transitioned
to color). They've have a live, big pipe organ open the proceedings and we'd all be
seated by the time the organ presentation had cycled. People were more repressed
sexually then than now, and women just didn't drop in to strip-clubs or clubs with
other women or by themselves. Instead, young, under-aged girls frequented movies
for cultural enlightenment. Adolescent girls and seniors often surrendered to 'sneak
previews' of "for adult only" audience releases. (One often had to show identification.)
Thus, we got two movies for the price of one, plus an erotic "sneak" about inner-African
culture (or Australian Bush) for our dollar. We were also getting Green Stamps for
grocery purchases. (You stuck the stamps in books until reaching a certain amount
and then redeemed the books for merchandise.) (At the movies in the Thirties, they'd
distribute free porcelain dinnerware (cups/saucers/plates) to increase patronage where
patrons could idolize scantily clad Ziegfeld Chorus girls. We would then go home and
sew our version of the romantic fashion to match the market's mood.)
Nowadays, pharmacies have ad sneak previews of next-week's specials available from
Thursday forward. They email a million-plus accounts to offer the sneak-preview ads.
Yah, I too consented to receive sneak-preview ads, in fact I get two regularly. No stamp
enticements, no au-natural bodies either, but still plenty of 'reward' incentives to attract buyers. Nowadays, they 'load' a reward card. So what's so 'sneak' or erotic about
releasing an ad 'early'?
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With its 'Nearby Friends' feature, the social media giant enters an already crowded and somewhat contentious space occupied by the likes of Foursquare and Tinder.
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