Must-know: Why LinkedIn stock could still be overvalued

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Jul. 10 2014, Updated 12:00 p.m. ET

LinkedIn’s stock declined more than 6% on July 8

In the earlier parts of this series, we discussed why the overall tech sector—and especially Internet stocks like Twitter (TWTR), Facebook (FB), and Pandora (P)—just saw a big decline on July 8. LinkedIn’s (LNKD) stock wasn’t spared from the fall either. It declined more than 6%. LinkedIn has three main business lines:

  1. Talent Solutions – 58% of revenues
  2. Marketing Solutions – 22% of revenues
  3. Premium Subscriptions – 20% of revenues

LinkedIn’s Talent Solutions business deals with recruiters and corporates. These parties pay LinkedIn for access to branded corporate pages, targeted job ads, and the database of LinkedIn users and résumés. In the Marketing Solutions business, advertisers pay LinkedIn for targeted ads on a pay-per-click basis. Under Premium Subscriptions, LinkedIn users pay for services like 3rd Degree Name visibility, InMail, or Who’s Viewed Your Profile Pro.

Could LinkedIn’s stock still be overvalued?

The chart above shows you a comparison of the price-to-sales ratio for Internet players. The price-to-earnings ratio isn’t an appropriate metric for some companies due to their negative earnings.

The chart shows that in terms of the price-to-sales ratio, LinkedIn’s stock is more expensive than Google (GOOGL) and Yahoo (YHOO). But it’s cheaper than Facebook (FB) and Twitter (TWTR). LinkedIn’s revenue growth of 46% is also decent. This justifies LinedIn’s current price-to-sales ratio.

But the point you need to note here is that LinkedIn expects its sales to range between $2.06 billion and $2.08 billion for full-year 2014. This is below analysts’ expectations of $2.11 billion.

LinkedIn announced its outlook for 2014 along with its Q1 2014 earnings in April 2014. The tepid outlook made investors unhappy. So the stock declined 3% on the day of the announcement. Slower revenue growth could take LinkedIn’s stock down even more.

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