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5 Solid Reasons LinkedIn Stock Is Headed for a Crash

LinkedIn (LNKD) shares stayed around $100 for a second straight day even though no sensible person believes the company is worth that much. The career networking site now has a market cap of $9.5 billion, larger than Chipotle (CMG) or Tiffany (TIF), which -- just to emphasize -- sell food and gold.

There are five reasons LNKD holders should sell right now before the shares crash. And they all say something about how well the company is managed:

  1. LinkedIn has only sold 5.3 percent of its outstanding shares. When the rest of those shares hit the market the existing stock will be diluted -- and the price will fall. Jim Cramer is absolutely right about this -- it's an ethically dubious way to float a company.
  2. The new shareholders do not, in fact, "own" the company. LinkedIn has a dual class stock structure. Class A shares -- the ones at $100 on the ticker -- carry less than 1 percent of the voting power of the company. The Class B stock -- owned by the founders, naturally -- control 99.1 percent of LinkedIn's voting authority.
  3. Management has not previously told the truth about LinkedIn's profitability. Since 2007, founder Reid Hoffman and CEO Jeff Weiner have alternately claimed the company was profitable. When it filed for its IPO, however, it turned out that the company made a $328,000 profit in 2007 but was essentially a money loser until 2010.
  4. CEO Weiner's compensation package contains no equity incentives. He will not be rewarded for increasing shareholder value. Rather, he is rewarded on mushy metrics such as making the board feel good about itself.
  5. While revenues rose by a factor of 2.1 in Q1 2011, operating expenses increased at a faster rate -- 2.3 times. LinkedIn's sales and marketing costs -- the company's biggest operating expense -- went up 2.8 times. The company made only a $2 million profit on $93 million in revenue. This company is working very hard, on very thin margins, to make its money.
That last statistic tells you all you need to know about LinkedIn -- it's a nice company that performs a useful service for jobseekers, but it's not a spectacular business. Rather, it looks a lot like this decade's Monster.com (owned by Monster Worldwide (MWW), formerly TMP Worldwide). That company had revenue of $914 million last year -- it's far larger than LinkedIn -- yet its market cap is a modest $1.9 billion.

LinkedIn is a bubble: Get out now.

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Image by Flickr user EricLBC, CC.
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