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Link Into Earnings With LinkedIn

Forget about Facebook (NASDAQ:FB) and its recently unveiled Home software for phones powered by Google’s (NASDAQ:GOOG) Android OS. There’s only one social media stock worth owning right now.

That’s LinkedIn (NYSE:LNKD).

Just look at the performance. Consider that, while the Facebook IPO remains a big black eye for the company and shares are off considerably from their offer price, LinkedIn offered at $45 and doubled in a day or so.

And right now? It’s trading at more than $170 — almost four times the initial public offering and roughly double where it was after the first day of trading.

More recently, Facebook has underperformed the market in 2013 with a meager 2% gain … while LNKD stock is up 50% since Jan. 1.

Past performance is no guarantee of future returns, however. So let’s look at what’s up next for LinkedIn and why it has momentum heading into earnings season:

February’s Earnings Blowout: A big catalyst for the surge in 2013 was a blowout earnings report in February, including an 81% jump in revenue year-over-year and profits of 35 cents per share on estimates of just 19 cents. LNKD stock could pop again on May 1 when it reports Q1 numbers. There have already been a few upwards revisions to estimates, and if that trend continues through April, it could portend another blowout report. Forecasts are for another 50% increase in revenue this year — so topping that outlook would be quite a feat.

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Companies as Customers: LinkedIn clearly has an appeal for individuals who are networking with peers or job hunting. But the annual report unveiled in February showed that Corporate Solutions customers — enterprises or professional organizations that use LinkedIn for recruiting or marketing services — jumped 78%. LinkedIn is committed to diversifying its revenue stream with premium subscriptions for individuals, paid job ad postings and corporate accounts, which will ultimately provide stability as well as growth.

A Real CEO: There are some Web 2.0 companies that have suffered mightily from ensconcing a cute boy wonder as CEO despite obvious shortcomings. (I’m looking at you, Groupon (NASDAQ:GRPN) and now-departed exec Andrew Mason.) However, LinkedIn CEO Jeff Weiner joined LinkedIn in 2008 after serving as a vice president at Yahoo! (NASDAQ:YHOO), so the company has a true digital media executive and not just some Silicon Valley hipster at the helm. That matters a great deal for both strategy and investor confidence.

Disrupting the Disruptors: As an ink-stained wretch who lived through upheaval in the newspaper business, I am very familiar with how industry message boards or job portals like Monster Worldwide (NYSE:MWW) upended the print classified ads game. However, these first-generation disruptors are now being blown up by LinkedIn as it connects professionals and allows job hunting in a new, social form. I know managers who rely solely on LinkedIn and word of mouth to hire mid- to upper-level employees — which shows that this social media company is rapidly becoming the new way to hire or find work.

The big issue for LinkedIn, of course, isn’t its growth — which seems all but certain. Rather, the question is one of valuation. At roughly 80 times forward earnings and after a red-hot run, some are concerned they’d be buying a top.

In fact, last week UBS just started coverage of LNKD at “neutral” and a target of $180, only slightly above the stock’s current price.

But be careful about relying too much on P/E alone. After all, Amazon.com (NASDAQ:AMZN) has boasted a nosebleed earnings multiple for ages but investors have confidence in the brand, the leadership and the growth trajectory. AMZN has a forward P/E of more than 70 but has returns that double the market in the past 12 months.

Momentum stories like LinkedIn admittedly do end in tears once the music stops. But I remain convinced that there is still time to make a short-term trade in this social networking powerhouse, based on its previous earnings performance and current outperformance.

Just be prepared for a wild ride … and make sure to use stop-losses to protect yourself.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing he did not own a position in any of the stocks named here.

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