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Thursday, August 15, 2013 - 11:30
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Thursday, August 15, 2013 - 11:30

Forget Facebook, This Is The Social Media Stock To Own

Thursday, August 15, 2013 - 11:30am

Personal, business, class and even international - this trend crosses all boundaries.

While it is built upon the basic principles of human collaboration and friendship, this trend has been supercharged by the connective power of the Internet.

I am talking about networking.

Before the Internet, individuals had no choice but to meet face-to-face. This often restricted interaction to geographic locations and ingrained habit.

Sites like Facebook (Nasdaq: FB) changed all that. And there is another social media opportunity that beats out even Facebook. I'm going to tell you all about it. But first, I want to share with you my foray into social media.

I consider myself tech-savvy and an early adopter. However, my first real exposure to the new networking trend left me a little embarrassed.

I had just finished lunch with a friend from the University of Pennsylvania. When we parted, he asked if I was on Facebook. "Facebook? What the heck is that?" I asked.

Remember, this was back when Facebook was exclusively for Ivy League universities. He explained that it was a great networking site for college students and others.

My friend pointed out that Facebook was more exclusive than Myspace or Friendster and required a ".edu" email to join.

"Not only that, but it's going to soon expand to everyone and make the greatest stock investment ever," he said. What he didn't know was that there would be an even greater opportunity down the road. What is it? Well, it's none other than LinkedIn (Nasdaq: LNKD).

Flickr/Nan Palmero
Unlike Facebook, which disappointed investors with its IPO, LinkedIn is making its investors wealthy.

Unlike Facebook, which mostly concentrates on the social purpose for the end user, LinkedIn is focused on professional/business networking with the socializing aspect as a secondary function.

Founded in 2002 in co-founder Reid Hoffman's living room, the company has rapidly expanded into a leading social media company. Boasting more than a quarter-billion members with 65% outside of the United States, LinkedIn is the largest professional network in the world. Job seekers, deal makers, business owners, and all strata of management/worker positions are represented. In fact, new users are flocking to the site at a rate of two per second, according to company data.

This growth has recently sparked heavy investor interest in the shares. The stock price has exploded by more than 400% since 2010, doubling in value during 2013 alone. Unlike Facebook, which disappointed investors with its IPO, LinkedIn is making its investors wealthy. Here's why.

Revenues at Facebook are primarily derived from advertising. This makes the company vulnerable to the success of its advertisers. No one is going to continue marketing in a manner that doesn't produce returns. LinkedIn relies on a more diversified revenue model that consists of approximately 30% advertiser, 35% premium subscription, and 35% job listings. This revenue diversification provides LinkedIn more "staying power" than a primary advertising-funded model. Facebook boasts an incredible 1.11 billion monthly users, which dwarfs LinkedIn's membership. Despite the size difference, the upwardly mobile professional user base of LinkedIn creates a more powerful marketing platform than Facebook's younger audience.

LinkedIn is developing a stable of "influencers." This program consists of 300 influential high-profile users of the network such as President Barack Obama and Bill Gates. These influencers are able to syndicate their posts for increased exposure. The goal is to create an informational hub and publishing platform for original content, while adding value to the site's users.

These improvements create what's called "stickiness" in Internet parlance. Stickiness is what keeps users coming back for fresh content rather than changing to another site.

Taking a look at the second-quarter performance of the company reveals a near 60% revenue increase year over year, net income of $3.7 million compared to $2.8 million for the same time last year and a 37% increase in membership growth.

Add these advantages to the 60% annual analysts' earnings growth projection over the next five years and it adds up to a lucrative investment opportunity.

Risks to Consider: While the diversification of LinkedIn mitigates many of the threats facing other social networks such as Facebook, risks still remain. The company remains valued on its future growth prospects. It needs to continue its rapid growth to maintain high investor interest. Investing in Linkedin right now is a bet on its continual growth.

Action to Take --> Buying shares now based on the upward momentum makes solid technical sense. However, shares are very expensive at more than $241. My target price is $330 within the next 12 months. This creates an opportunity for option leaps.

Leaps are long-term options that cost much less than the shares themselves and provide the leverage required to participate in the stock's bullish move without tying up the capital required to buy the shares directly. Just like regular options, one leap is equivalent to 100 shares. Presently, I like the January 2015 $300 strike price leaps, which are selling at $27.50 right now. Substantial profits can be made if shares of LinkedIn move above $300 by the expiration date in January 2015.

P.S. -- LinkedIn isn't the only company making noise in the tech industry. Apple just made a little $256 million move that could have huge consequences on your wallet. Click here to find out how the tech giant is threatening the entire banking industry.

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.