It can be observed from the chart that the stock was valued around $64 in January 2012 and it followed a steep incline reaching around $116 in May 2012. After a slight decline, the stock inclined again reaching around $120 in September. This unpredictable performance is not unusual among stocks related to the social networking market. The social networking market tends to show a highly volatile behavior, therefore the rise and fall of relevant stocks cannot be predetermined with a high level of certainty. The steep incline in LinkedIn’s stock value in the past year has concerned many analysts and these concerns are projecting a negative prospect for LinkedIn in 2013. Currently, LinkedIn’s shares are being traded within the range of $111.12 and $112.91.
Downgrade by Barclays
Some analysts, including those at Barclays have concerns regarding the valuation of the stock and this is the reason behind the downgrade of LinkedIn’s stock by Barclays to ‘equal weight’ from ‘overweight.’ Drew Fitzgerald from Dow Jones said, “Bullish on LinkedIn for more than a year, Barclays finds no reason to boost its $125 price target further and hence downgrades the professional-networking service to equal weight. Wall Street's 2013 revenue estimate is now 8% above Barclays' view and the investment bank thinks LNKD's initial forecast "could come in slightly below consensus," especially "given management's history of conservatism." The investment bank also stresses that its downgrade isn't the result of a darkened view on LNKD: "We continue to be positive on the fundamentals and growth outlook."
LinkedIn’s Financial Performance
The trend of profitability of LinkedIn for the past four quarters has been downwards. In the quarter ended Sept. 29, 2012, the company reported a net income of $2.3 million which was lower than that of the quarter ended June 29, 2012, which stood at 2.8 million. Although there is an upward trend in the revenue of the company throughout the last four quarters, the decline in net income can be attributed to the rise in operating expenses of the company, which mainly constitute research & development, and selling and administrative expenses. Therefore, it can be said that prospects for the financial performance of the company are also unconvincing.
LinkedIn and Facebook
Where on one hand LinkedIn is an online professional network, Facebook (NASDAQ:FB) is a more comprehensive social network and this similarity of services makes both these companies natural competitors. There is an interesting trend in the market performances of both the companies at the start of the New Year. Whereas LinkedIn is being downgraded for being overvalued, Facebook is being upgraded due to its prospects for positive financial performance in 2013. Facebook faced a tough time in 2012 due to a number of factors such as its IPO and ineffective strategies for revenue maximization. Contrarily, LinkedIn had a commendable year on the whole with regard to its market performance. Currently, Facebook is dominating the social networking market. In summary, it can be said that the stock of social networking companies can be highly predictable. Considering the scenario of LinkedIn and Facebook, tables can turn for the stocks in the social networking market at any time.
After the analysis of LinkedIn’s market performance, its competition with Facebook, and its financial performance, in my opinion, investors should sell the stock in the company. The rationalization behind this recommendation is that the stock stands at a high value at this point and this could also be the peak of the share price. Considering the concerns regarding the overvaluation of the stock, the share price is likely to fall in the near future; therefore, in order to avoid a possible loss it may be a favorable decision to sell the shares in the company while the stock is being traded at a favorably high price.