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LinkedIn: A Stock That's Ahead of the Social Media Pack

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Although rising costs make it an aggressive buy, this company leads the social media space.

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Of all the social media IPOs in the past few years, LinkedIn (NYSE:LNKD) has put on one of the strongest performances.

The stock has soared from its initial price of $45 on May 20, 2011 to today's level of more than $170. Compare that to Facebook (NASDAQ:FB), which is down 30%, and Groupon (NASDAQ:GRPN), which has plunged nearly 73% since its IPO.

LinkedIn is a social network for professionals. According to its Web site, it now boasts 200 million users in over 200 countries and territories, with a growth rate of two new members per second.

It's free to post a profile on LinkedIn, though the site also offers premium subscriptions for a fee. These accounts give you access to more services, such as the ability to contact a larger number of LinkedIn members, see a complete list of who has viewed your profile, and conduct automated searches.

The company operates through three divisions. Talent Solutions, which supplied 53% of LinkedIn's revenue in the latest quarter, helps recruiters find and contact workers by using targeted filters to isolate the skills they're looking for. Marketing Solutions (27.4%) mainly handles advertising and job postings on the site, and then the aforementioned Premium Subscriptions (19.6%).

These three revenue streams give LinkedIn a much broader base than Facebook, which gets 84% of its revenue from advertising. And while LinkedIn has far fewer users than Facebook-which boasts over 1 billion-its audience is more attractive to advertisers, because they are clearly identifiable as job seekers and businesspeople.

The company is also doing an admirable job of building up its international sales. In the latest quarter, countries outside the US chipped in 37.75% of LinkedIn's revenue, up from 33.25% a year ago.

LinkedIn's growth has certainly been impressive, and it has done well at carving out a unique place for itself on the social media landscape, but it does face risks.

During the fourth quarter, revenue surged 81% from a year ago, to $303.6 million. Excluding certain items, such as tax-affected stock-based compensation, it earned $.35 per share, up sharply from $.12. These figures were well ahead of the consensus forecast of $.19 per share in profits on revenue of $278 million.

However, LinkedIn's total costs grew nearly as quickly as its revenue, rising 75.6% from a year ago to $276.9 million. Spending on sales and marketing nearly doubled, to $100.1 million from $53.2 million, while costs to develop new products jumped 83.8% to $77.3 million.

Meanwhile, revenue growth, while still impressive, is slowing somewhat. In the third quarter, it matched this quarter's clip of 81% year-over-year, but that was down from an 89% rise in the second quarter and 101% in the first.

LinkedIn is spending heavily to grow its membership quickly and add new features to keep them on the site longer. Another big cost for the company is the development of mobile apps.

According to tech Web site GigaOM, tablet and smartphone users now account for 15% of all visits to LinkedIn. But like many social media sites, the company hasn't found a way to fully monetize those visitors, partly because ads don't display as well on smartphones' small screens.

The stock is also no bargain, at least in relation to earnings. It's trading at 917 times its last 12 months of per-share net income. Excluding unusual items, analyst estimates put LinkedIn's earnings at $1.34 per share next year and $2.09 per share in 2014. But the stock still trades at 130 and 83 times those estimates, respectively.

Pressures like these are one reason why Investing Daily's Ben Shepherd warned in November 2011, and which is still important to keep in mind now: "At this point, an investment in social media is an extraordinarily aggressive play."

Editor's Note: This article was written by Chad Fraser of Investing Daily.

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No positions in stocks mentioned.
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