LinkedIn's Billion-Dollar Share Sale: Should You Be Buying?


Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

U.S. stocks are little changed this morning, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average up 0.38% and 0.2%, respectively, as of 10 a.m. EDT. The specter of a U.S. strike -- even a limited one -- in Syria is almost certainly weighing on investors as the Obama administration continues to lay the groundwork for such an action.

Investors are right to be at least a little bit nervous: While on the face of it, a "surgical" missile strike on Syria would appear to be a low-risk form of retaliation for the alleged use of chemical weapons by the Assad regime, this sort of thing can have unintended consequences.

You've come a long way, LinkedIn!
What a difference two years makes! Back in November 2011, when professional-networking site LinkedIn pursued a secondary share sale, it was unable to raise the $100 million it was aiming for (the company had to settle for $88 million.) Yesterday, the company filed a prospectus for a $1 billion stock offering that grants the underwriters the option to purchase another $150 million of shares.

Since the 2011 offering, LinkedIn's shares have more than tripled:

LNKD Chart
LNKD Chart

LNKD data by YCharts.

According to the offering prospectus, "The principal purposes of this offering are to increase our financial flexibility and to further strengthen our balance sheet."

Really? Because with $873 million in cash and equivalents and zero debt (as of June 30), that balance sheet looks pretty darn strong already -- particularly when one considers that the business is solidly profitable, generating nearly $240 million in free cash flow over the past 12 months. Indeed, the company itself admits that "based on our current cash and cash equivalents balance together with cash generated from operations, we do not expect that we will have to utilize any of the net proceeds to us of this offering to fund our operations during the next 12 months."

All of which makes the following language sound like boilerplate: "As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us of this offering. However, we currently intend to use the net proceeds to us from this offering primarily for general corporate purposes, including working capital, further expansion of our product development..." and blah blah blah, etc.

However, this looks a bit more interesting: "We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, although we have no present commitments or agreements to enter into any acquisitions or investments."

After all, LinkedIn has already made several acquisitions, including mobile newsreader Pulse and online presentations site SlideShare. For my money, LinkedIn is building a war chest for just such bolt-on acquisitions.

LinkedIn is a terrific business with a genuine competitive advantage in the network effect: If you were going to join a professional networking site today, why would you consider joining any site other than LinkedIn, unless you are in an extremely esoteric field? Similarly, once you've joined, why would you consider defecting to another site?

Does this mean you should be buying the stock today? Not so fast! When a company is selling shares, it usually selects a time when it will get more than its money's worth (assuming it isn't in financial distress, which isn't the case here). At 143 times estimated earnings per share for the next 12 months, I'd recommend investors consider the sort of growth that is embedded in that multiple before buying the shares.

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The article LinkedIn's Billion-Dollar Share Sale: Should You Be Buying? originally appeared on

Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool recommends LinkedIn. The Motley Fool owns shares of LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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