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May 30, 2012

Stock of the Day

Recommendation: B-rated Buy

Welcome to the Stock of the Day for May 30, 2012. Just over a year ago, professional social networking giant LinkedIn Inc. (LNKD) went public at a valuation of $9 billion. Now that the company has had four quarters of earnings announcements under its belt and more stable buying pressure, let's revisit this company and see whether it has lived up to Wall Street's high expectations for it.

Company Overview: LinkedIn is a social networking website that contends with the likes of Facebook and Twitter by catering to professionals looking to advance their careers. But while LinkedIn competes with Facebook and Twitter for user attention, its business is quite different—as career and job markets become increasingly Internet-based, LinkedIn's services will become even more useful. For example, many companies are offering applicants the opportunity to simply upload their LinkedIn data to a hiring application to save time. With over 150 million users in more than 200 countries, LinkedIn brought in $522 million in FY 2011.

Earnings Buzz: After the company's first-quarter earnings announcement, shares of LNKD soared 9% to a new high. Compared with the same quarter last year, first-quarter adjusted earnings surged 191% to $16.9 million, or $0.15 per share. Analysts forecast earnings of just $0.09 per share, so the company posted a 67% earnings surprise. Over the same period, sales doubled to $188.5 million; this topped the $178.6 million consensus estimate by 6%. Management also announced that LinkedIn Inc. was acquiring SlideShare, a professional content hosting service, for $118.8 million. Finally, the company raised its 2012 sales guidance above the Street view.

Industry Breakdown: There are currently 88 companies in the Internet Information Providers industry. Of those, LinkedIn Inc. is sixth largest in terms of market capitalization. The company also stands out on a number of other fundamental fronts as well, most notably that it has the highest long-term growth rate in the industry (66%). LinkedIn Inc. also has the fourth highest Price/Earnings to Growth ratio and the seventh-highest sales growth rate. Now, one thing to keep in mind is that this company has a very high Price/Earnings ratio as well; it is the second-highest in the industry. Finally, the company's return on equity weighs in at no. 23.

Current Ratings: Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. LNKD was added to my Portfolio Grader database shortly after its most recent earnings announcement a few weeks ago, and it has held constant at a B-rating. That's because this company has stable buying pressure in addition to largely solid fundamentals. LinkedIn has figured out how to maximize sales growth, earnings growth, as well as how to top analyst estimates consistently. However, there is plenty of room for improvement in terms of cash flow, return on equity, and especially operating margin growth. LNKD receives a B for its Fundamental Grade and a B for its Quantitative Grade as well.

Bottom Line: I don't usually recommend buying into a newly public company, but now that LNKD has proved itself on the earnings front I am more confident about this stock. LNKD is ranked as a buy, but keep in mind that investor expectations for growth are high—the company has a 600+ PE ratio.

Sound Off: What do you think about LNKD? Are you a buyer at current prices? Let me know what you think by posting on our wall on Facebook. For more stock grades and commentary, please visit!

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