LNKD: A Great Model for Investing in Growth Stocks
Given the 1-star rating that LNKD has on CAPS, a lot of players took a big loss on Friday. How could so many people be wrong?
Easy - they were fooled (pun intended) by the valuation of the stock. Sadly, many investors just look at P/E - as if its the end-all, be-all of all metrics (and I understand the irony of my handle). That said, some investors just simply thought that LinkedIn couldn't keep the revenue upside, especially for paid-for services. In that case, they just bet on the wrong side of the coin.
For the investors that rated LinkedIn "overvalued", here is what you missed. The "P" in the P/E is very high, so you really need to focus your attention on the "E".
So now take a look at how revenues convert to earnings -- the Balance Sheet. What if LNKD stopped growing R&D and SG&A? I personally believe that their biggest sales force is word of mouth and HR recruiters needing to find talent. With that hypothesis -- they will continue to grow at very high rates EVEN IF THEY SHUT OFF SPENDING. The result is a P/E that plummets faster than a lead weight in water. Do the math... Chopping their growth rate to 20% with no change in spending gets them to a P/E of 30 within just a handful of years.
A big kudos to LNKD for investing hard now and fueling their growth. If you consider the fact that B2B spend is 50% of the economy vs. 50% B2C, you should be using FB as benchmark of where LNKD can potentially go - not to mention the overstated "barrier to entry" argument that FB has continued to expose as down right silly.
That's why I own LNKD and will continue to buy.