LinkedIn underwriters say the stock is overpriced

LinkedIn IPOLinkedIn was overpriced since day of its listing when it was trading at $80. Since then LinkedIn shares have been trading higher in range of $100-$110 with a decline till $60 for short time. In my post LinkedIn made $175 Million less on its debut, shares highly priced, I said that LinkedIn is overpriced and it might not be the right time buy its shares. I have also told in the post that underwriters of LinkedIn sold the shares at discounted price to its institutional investors. Here is an extract from the post:

Morgan Stanley and BOFA sold LinkedIn’s share to their institutional investors at $45/share. Now, as soon as company got listed the institutional clients made instant profit of 100%. Underwriters are expected to sell the shares of listing company at a discount of 10-15% but in this case they sold it at 50% discount. But, Morgan Stanley and BOFA should be given credit for their exceptional work in making this IPO a super hit among investors.

Now the problem, LinkedIn has shown phenomenal growth this year. Its 2010 revenue grew 102% to $243.1 million while its $15.4 million in net income was 487% above 2009?s level. This data might show great prospects of LinkedIn but the company might have to incur loss next year because of its expansion plans. This make company’s prospects inconsistent and current stock levels unsustainable.

At $80, which is the current price of stock, LinkedIn’s P/E is 470.5 when calculated at 2010 earnings per share of 0.17. This is very high when compared to any of the big technology stocks like Apple or Google with P/E of 16 and 22 respectively. Even P/E of broader indices like S&P 500 is 16.So, current level and some basic valuations makes this stock a very risky asset to keep.

Yesterday, two of the underwriters of the LinkedIn IPO changed their views on LinkedIn. Morgan Stanley analyst Scott Devitt reduced his rating to “equal-weight” from “overweight,” becoming the second analyst from a LinkedIn underwriter to lower ratings on the company. Analysts at JPMorgan Chase & Co., which also helped manage the IPO, cut their rating to “neutral” from “overweight” in July. This lead to the fall in the share prices of LinkedIn by almost $9/share before it recovered $4.2 before closing.

linkedin chart 10 aug 2011

Bloomberg reports:

LinkedIn, which in May became the first U.S. social network to hold an IPO, has hired sales staff and added features to attract recruiters and professionals. The Mountain View, California-based company, which has 115.8 million members, gets revenue from advertising, subscriptions for premium services and by offering recruiting tools to corporations.

Second-quarter revenue soared to $121 million, LinkedIn said. Sales from hiring services almost tripled to $58.6 million. Advertising revenue more than doubled to $38.6 million, and sales from premium subscriptions increased 60 percent to $23.9 million.

In last year’s second quarter, the company had profit before some costs of $6.44 million, or 7 cents a share. Net income in the recent period was $4.51 million, or 4 cents, LinkedIn said.

Third-quarter revenue will be $121 million to $125 million, the company said. Analysts had projected $113.9 million, according to Bloomberg data.

LinkedIn has been growing good with revenues rising exponentially but we will have look how long will this growth carry on and even the high growth rate of the company can not justify the current levels of its share prices.

Hitesh Anand

I am a post graduate from Newcastle University, UK. I like studying and analyzing economic data and financial health of world.

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