Forget Twitter and Facebook! Here's the One Social Media Stock to Buy for 2016

Editors' Pick: Originally published Dec. 29.

As we tally year-to-date stock performances in the final days of 2015, many of Wall Street's erstwhile angels have dirty faces. Chief among them: Chipotle Mexican Grill (down 28%); GoPro (down 72%); and Twitter (down 37%).

But one "trendy" stock that gets a lot of press has held its own: LinkedIn (LNKD) . Essentially flat for the year (in line with the S&P 500), LinkedIn has racked up a five-year gain of 146%, vs. 65% for the S&P 500. On average, analysts expect this stock to gain another 22% over the next year, a period that's expected to be mediocre at best for the broader markets.

LNKD Chart

LNKD data by YCharts

LinkedIn is a rare hybrid animal: a social media stock with stability. That's in stark contrast to a group of overhyped and overvalued investments that are poised for sharp tumbles in 2016.

LinkedIn is the world's biggest professional networking service on the Internet. Based in Mountain View, Calif., the company was founded in 2003 by former PayPal executive Reid Hoffman, who has emerged as a Silicon Valley guru and billionaire.

LinkedIn reported stellar third-quarter operating results that position the company for outsized performance next year. The company's third-quarter revenue increased 37% year over year to $780 million. Adjusted earnings before interest taxes, depreciation and amortization was $208 million, or 27% of revenue, roughly equal with the same period a year ago. Adjusted earnings per share improved to 78 cents, compared with 52 cents in the same period a year earlier.

Management gave full-year 2015 guidance of revenue in the range of $2.975 billion and $2.980 billion. Adjusted EBITDA is expected to come in at about $740 million. Non-GAAP EPS is expected to reach $2.63.

LinkedIn's cumulative membership in the third quarter grew 20% year over year, to 396 million. That's a big jump, but then again, monetizing member bases and viewership on the Web is notoriously difficult, as the demise of many once-dominant media empires attests. Many social media brainchilds have enjoyed meteoric rises, only to crash because they put all of their revenue eggs in one precarious basket.

One big secret to LinkedIn's success is its multifaceted revenue approach through three business divisions that pursue new sales in three distinct ways: recruiting-tools division, marketing-solutions and premium subscription sales.

Unlike peers such as Facebook and Twitter, LinkedIn gets a much smaller portion of its total revenue from advertising, and instead charges users of premium services a fee.

Admittedly, Facebook now has more than 1 billion monthly active users. But most of these users are millennials, a customer base that's mercurial and suffers from a collective short attention span, as opposed to LinkedIn's more affluent business-oriented clientele.

Once ridiculed by the techno-cognoscenti as "Facebook for losers," LinkedIn now exerts profound influence on professional networking and recruiting around the globe. The company's membership is also branching out beyond just corporate executives and attracts creative people from all walks of life.

Since its IPO in 2011, LinkedIn has consistently produced strong and growing earnings, as opposed to the checkered performance of social media competitors such as Facebook and Twitter. Indeed, vulnerable stocks such as Twitter belong to a class of dangerous investments you should either sell or shun right now.

LinkedIn's management is intent on expanding the company's international footprint in 2016, particularly in the developing countries of South America, Asia, the Middle East and India, where technologically savvy consumers are entering the middle class and are becoming attuned to the importance of professional networking.

The spread of corporate outsourcing to India has made the country a source of enormous opportunity for LinkedIn. The majority of Indian members on LinkedIn toil in the growing fields of information technology, computer software, telecommunications, and financial services. Accordingly, LinkedIn has opened new offices in Bangalore, Delhi, Mumbai, and Bengaluru.

The company's trailing 12-month price-to-sales ratio of 10.84 compares favorably to Facebook's trailing 12-month price-to-sales ratio of 18.80. With LinkedIn's stock price now trading at $229, analysts on average are projecting a one-year target of $280, for a gain of about 22%.

With a market cap of $30.12 billion, a fast-growing membership, brand-name affinity with users, diverse revenue streams and an aggressive expansion strategy for the future, LinkedIn is linked into growth.

As we've just explained, LinkedIn looks like a smart way to profit from the increasing pervasiveness of social media. But when a correction or terrorist attack occurs in 2016, there's a group of stocks that will hit the skids and never recover. Click here for a free report that lists the dangerous stocks you should sell immediately.

 

John Persinos is editorial manager and investment analyst at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.

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