I looked at these two stocks some time ago and while I loved LinkedIn and had acknowledged that I might regret it at some point. Why? Because I thought LinkedIn was a terrific company that was simply a bit too expensive for me.
Social Stocks/Companies Are Not Dead
Many of you know that I’m long Facebook (FB) so it’s not a big surprise that I think the “death” of social stocks such has been overstated. Yes, Facebook’s stock has declined greatly as has been the case for Zynga (ZNGA), Groupon (GRPN) and others. That was mostly about valuations though and while I still think that Facebook is a great buying opportunity right now (I know, that is so not the “trendy position”), clearly investors disagree. That’s great. I’m clearly not investing on Facebook based on the growth of its display ads business in the next 3-5 years. I’m betting on the fact that much more exciting and profitable things will come around.
Facebook and LinkedIn Are Worlds Apart
Yes, they are both social stocks but apart from that, they are different in almost every way.
-User Segment: While Facebook has a billion users from nearly everywhere in the world, every walk of life, etc.. LinkedIn has mostly focused on working professionals. That has profound impacts on what the users expect from the social network.
-Revenue Sources: Facebook has mostly been about display advertising on its site, the sidebars and more recently user news feeds. LinkedIn has been able to do some of that but also focus on selling premium memberships to recruiters, companies, etc.
-Untapped Potential: Facebook could go in so many different ways. It could become the default way to pay and identify ourselves on the web, could become a giant closed platform (similar to Apple in some ways), etc. LinkedIn on the other hand will probably end up taking away a lot of business from companies such as Monster Worldwide (MWW), Dice Holdings (DHX) but also become one of the premiere sources of data for human resources consultants, etc.
-Visibility: Because in part of their different audience but also their leadership, they have very different levels of visibility. Facebook’s every move is met with analysis. Just think of how much its recent IPO was analyzed when you compare it with the LinkedIn one. LNKD seems to be able or willing to fly under the radar a lot more which certainly has its pros and cons. Facebook has also been a lot more challenging to deal with for the web giants like Apple and Google.
If you ask me which of these two companies I think has a better shot of doing well and dominating its market 5 or 10 years from now, I’d probably say LinkedIn. I think the brand is terrific and it has been doing all of the right things. That is not what it’s all about though
Let’s Take A Look At Valuations
First, the broad revenue numbers:
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Then, we can compare revenues and profits. I think it’s likely that LinkedIn will have significantly higher margins in the future because its costs are lower and it has higher margin activities (memberships, products, etc).
First off, let’s look at how revenues have evolved in recent years. Obviously, 2012 and 2013 numbers are analyst estimates. In terms of revenues, they should probably be considered in terms of their valuations. All things being equal (which they’re not), Facebook would have 3.95 times as much revenues given its market cap is 3.95 higher ($49.2B vs $12.45B):
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The higher has been trending lower which surprises me given the higher margins I’d expect from Linkedin.
In terms of earnings per share, I’d expect the EPS ratio to be about 5.72 times higher for LinkedIn given the fact that its stock price is that much higher ($118 vs $20.62):
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Again, this is where I get stuck. I love LinkedIn’s company, its fundamentals, its future prospects, and I’d never dare short the stock. But it is making less than twice what Facebook makes per share and is trading nearly 6 times higher… yes there is less risk involved but it still seems expensive to me. I might still become a buyer at some point in the near future but for now? I’m still more bullish on Facebook at these prices. How about you?
Disclaimer: I do have a long position in Facebook (FB)