LINKEDIN MAY HAVE STRONGER LEGS THAN YOU THINK
This article also featured on TheStreet.com & Fidelity
I was in the middle of writing the numerous reasons why LNKD was doomed from the outset of its NYSE listing. Visions of investors driving off a cliff in pursuit of the first big social networking play kept repeating in my mind. Then I started paying attention to my Twitter feed. One after another I saw bearish commentary with respects to LNKD. I had company. And not a little bit of company. Everybody on my Twitter feed agreed that LNKD is overvalued, overhyped. A bubble, a scam, a ploy to suck our money back into the market.
I decided to begin looking into the headlines with respect to LNKD. One after another. Bearish. Mega-bearish. Nuclear-bearish. Then I saw one lone bullish article. It was like a small squirrel scurrying through the leaves amongst the heavy footsteps of the bears. That small squirrel was Henry Blodget. His article about LNKD's prospects was written before the stock ramped 100%. Nevertheless, it was the only piece of bullish commentary I could find.
Earlier in the trading day I had written a brief thought about how LNKD was going to hurt investors. It still might. But I am beginning to think the timing of its pullback may be a lot longer than most suspect. The markets hate crowds. It doesn't matter what your numbers tell you about where a stock should be.
How many times have you bought a stock based on an arbitrary valuation metric and it did nothing for months? Years? A decade? Those numbers only mean something when they mean something. That means if there is no catalyst that allows the juice to flow out of the orange, it will simply remain in the bowl untouched.
The same thing goes for overvaluation in a stock. By every metric available -- based on current estimates -- LNKD looks extraordinarily overvalued. The market works in funny ways when it comes to mass realization of overvaluation. Two types of investors tend to be active in stocks that experience mass realization of overvaluation:
1. Nervous longs - buyers who believe the stock may be good for a short period of time but are quick to hit the panic button and eject once it drops 5 or 10 percent. These same nervous longs end up chasing the stock higher on every spike. This creates a support dynamic for the stock. They essentially want to own the company while avoiding the pain of the investment falling to Earth once gravity catches up.
2. Short sellers - by nature, short sellers are active in the marketplace. They will take profits on drops. They will also cut their losses and run should the stock spike. They tend to be more technically orientated traders. Short sellers also create a support dynamic for the companies stock.
Precipitous drops in a company's stock price only happen when everybody is on one side of the fence. Short sellers have vacated the premises due to massive pain inflicted by a skyrocketing stock price. Longs have all boarded the plane. There is nobody left below the market to supply a bid once buyers turn into sellers.
The dynamic I describe here may indeed end up becoming the modus operandi for trading in shares of LNKD over the intermediate term. Stocks simply don't experience the type of drop people are expecting with LNKD when everybody is expecting it. Valuation be damned. Market conditions be damned. Rational thinking be damned. Sometimes it's just that simple.
I'm on team Blodget. Whodathunkit?
