The Best Social Network Is Uninvestable

Web 2.0 has been a pain to invest in. I think we all understand that the social revolution is well under way, and that its value is, though tough to quantify, truly undeniable on a global scale. But in its infancy, profits seem tough to find and a long-term vision for monetization is ... well, tough to find. There is one social network that I believe has a solid business plan, that is ready to create real, significant cash flows, and that is way too expensive to warrant a dollar of your savings.

Social warfare
When the unfortunate term "social networking" rears its ugly head, the first thing that comes to mind for most is Facebook (NAS: FB) . The company helmed by somebody who looks like he could have been on Growing Pains is, no doubt, going to be an amazing investment when the company figures out how to leverage the billion people who use the service for free. I don't know when that will be, how the company will do it, or even if I will still be shamelessly self-promoting myself on my own Facebook page. As for now, Facebook and its so-so business model remains on my "Ha-ha, you've got to be kidding me" list of stock ideas, not far from Green Mountain Coffee Roasters.

To be fair to readers, I won't go over again my personal reasons for my distaste for Facebook, but my investing-related issues are highlighted in fellow Fool Alex Dumortier's recent article. Plainly put, Facebook simply can't measure up to market expectations anywhere in the near future. Not while earning $3.50 per user in revenue.

My smart money (term used as loosely as possible) would likely go to the other popular U.S.-based social network if it weren't for one thing -- the rent is too darn high.

The legend of Zelda
My poorly done Nintendo reference is actually about LinkedIn (NAS: LNKD) . Believe it or not, this guy likes LinkedIn as a business. Where the professional social network wins over Facebook is that it has successfully removed the crutch of advertising from the revenue model. According to a recent report, only 30% of LinkedIn's revenue is from advertising.

Though widely considered a success story among recent tech IPOs, LinkedIn shares are trading only slightly higher than their debut price from a little more than a year ago. However, the company is growing its non-ad-related revenue streams in an impressive manner. Hiring-solutions revenue is up more than 100%, and the premium subscriptions, which give users special access to who is viewing their profile and allows them to directly contact other members and recruiters, are up around 90%. This is the kind of growth you don't mind paying for.

Those are all first quarter results, and the company is expected to report again on Thursday.

The worst problem facing LinkedIn isn't LinkedIn's fault -- it's the market. The valuation for LinkedIn is simply unreasonable and sets the company up for quarterly crises when revenues don't double every time it reports. Expectations for forward earnings have the company trading currently at triple-digit ratios. When Google IPO'ed in 2005 with tremendous potential and media attention, even it was still trading at 88 times earnings.

I wouldn't be surprised if LinkedIn witnesses a tough day on Thursday, when investors and analysts see that the company, by no error of its own, cannot keep up with its own stock price. On the bright side, with the market incredibly harsh on companies like Facebook and Zynga (NAS: ZNGA) , a serious drop in LinkedIn share price could create a fair, if not undervalued, entry point for investors interested in the story.

Just the worst
Speaking of Zynga, it's worth it to note how LinkedIn is doing compared with its peers. We've already talked about Facebook and its lack of monetization capability, but what about the recently destroyed Zynga? It's in a different business, social gaming, but man, these guys are just no good. My friends who went through the Words With Friends phase and Draw Something addiction are now fully cured. The company is unable to create long-term value. People pony up $1 for an addictive game, use it for three months, and then drop it.

How many times can the company do that before the model proves to be garbage?

LinkedIn, though not directly, is in a similar business to Groupon (NAS: GRPN) . The similarity is the "social" factor, but both companies play in the Web 2.0 sandbox. Groupon is the one that dropped its lollipop in the sand and is now screaming bloody murder.

The deals company has failed to create value for its business partners. One-time events where customers get an incredible deal seem to not be yielding long-term relationships between new customers and local businesses. The loss-leading model isn't necessarily bad, but it is when you lead off with a loss and then the party ends. Retailers and businesses are much more wary of Groupon now that real data has proved its limited ability to be a value-added service.

There are great reasons both Zynga and Groupon are trading near their historic lows.

Have faith, my son
I believe in the LinkedIn story for the long run, just not at these astronomical prices. Keep an eye on Thursday's earnings to see whether the gains still have their-first quarter momentum. In the meantime, check out this premium report on Facebook highlighting where the company has been since its IPO, and where it's headed in the coming year. Claim your copy.

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Fool contributorMichael Lewisowns none of the stocks mentioned. You can follow him on Twitter,@mikeylewy. The Motley Fool owns shares of Linkedin, Facebook, and Green Mountain Coffee Roasters.Motley Fool newsletter serviceshave recommended buying shares of Facebook, Linkedin, and Green Mountain Coffee Roasters and creating a lurking gator position in Green Mountain Coffee Roasters. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.

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