5 reasons LinkedIn’s stock is set to plunge (LNKD)

Here are five reasons LinkedIn stock forecasts might be overly optimistic, and a fall from grace for the professional social networking company could be overdue.

Since its IPO on May 20, 2001, shares in LinkedIn Corporation (NYSE:LNKD) have tumbled 35 percent from a first-day high around $120 to $78 a share. That’s still 73 percent higher than the IPO price set by Morgan Stanley, Bank of America and JPMorgan Chase. And yet, not everyone’s convinced LinkedIn’s future looks like a fairy tale. Here are five reasons LinkedIn stock forecasts might be overly optimistic and a fall from grace could be overdue:

1) Small numbers. For the nine months ended Sept. 30, LinkedIn netted $2 million on revenue of $161 million, and the company is forecasting a loss for 2011 as it looks to aggressively expand its user base. Not only are the profit margins fairly small at LinkedIn, they’re going to be shrink as the company gambles on growth at the expense of profits. Ongoing losses could force out speculative investors with short investing timelines. Even the company’s initial IPO valuation at $4 billion “assumes an $100 million-plus in 2012 net, along with a Google-like growth trajectory for the next 5-10 years,” writes Promod Radhakrishnan at SeekingAlpha. Those are heady numbers for any company – even one with the clout of LinkedIn.

2) Narrow context. Investors and analysts seem overly eager to dub LinkedIn the next Facebook. The fact is the site serves a niche (white-collar employees and recruiters) that faces practical limits. All told, there are roughly 150 million people in the U.S. workforce. Of that number, approximately 60 percent (or 90 million) hold the professional, managerial and/or sales jobs that dominate LinkedIn’s user base. At the moment, LinkedIn claims more than 100 million users, and the U.S. market could be reaching maturity. Growth will likely be powered outside of the country where native start-ups are directly targeting LinkedIn. Facebook, which doesn’t serve a limited niche, will – by default – appeal to a broader user base (and likely grow faster as well).

3) “This is a sideshow.” To say LinkedIn’s meteoric valuation has professional investors scratching their heads is a bit of an understatement. Lawrence Haverty who helps oversee $35 billion at Gamco Investors, Inc., put it bluntly in an interview with BusinessWeek: “This is not something we even consider investing in. This is a sideshow. It’s a magic show. The only question for the investor is how soon they should sell.” Per Haverty’s EBITDA analysis, shares should be trading closer to $35 a share – not $80.

4) Insider selling. Six months from now, more than 85 million LinkedIn shares held by company insiders will start to be eligible for trading. That means the public’s been swapping back and forth a mere 7.8 million of the 95 million shares outstanding. Once supply and demand begins equalizing (and LinkedIn employees look to cash in on their paper wealth), prices could fall quickly.

5) Shorters aren’t in short supply. LinkedIn bears have borrowed 65 percent of the shares available for shorting, according to Bloomberg. That makes it the sixth-most shorted stock in the S&P by percentage. Indeed, the average S&P stock has a mere 8.2 percent of short-eligible shares actually sold short. There are a lot of folks betting on LinkedIn making lots of cash, but rest assured their are just as many convinced the stock’s setting up for a dramatic collapse. My guess is, the pros are short, and they’re probably going to make a fair amount of cash in the months to come.

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