Don’t be at all surprised if Warren Buffet decides to make a big investment in LinkedIn (LNKD, 0.07%) which currently has all the attributes Berkshire Hathaway (BRK.A -0.32%) looks for when investment time comes around.
Interestingly, there are similarities between LinkedIn and with what happened with Amazon (AMZN, +2.22%), Google (GOOGL, +0.66%) and Facebook (FB, +3.71%). They all underwent a sharp fall in value before rebounding and growing.
Buffet loves to go against popular investor sentiment which right now has shown a loss of confidence in LinkedIn. Investors started running in late April after the company announced reduced quarterly profits. This was contrary to investor expectations of increased profits and returns in their investment in LinkedIn.
The reason for the drop in profitability was the result of a restructuring of the company sales force as maintained by Doug Anmuth, J. P. Morgan analyst who said, “The company is better positioning itself for future growth”.
The selloff of LinkedIn shares can only be ascribed to emotional conduct and not a rational investment decision, with all the fundamentals in place and no evident intrinsic problems facing LinkedIn going forward. Nabil Elsheshai, an analyst with Thrivent Financial, said the sentiment that existed at the time of selling LinkedIn stocks under those circumstances could be described as emotional “hate selling” after profits failed to meet expectations.
This is an ideal Buffet scenario; to go against the crowd and buy while prices are depressed. Buffet seems to favor companies with a strong brand and a business model that is not easy to replicate. In addition, LinkedIn owns patents and unique networks which are precisely the attributes Warren Buffett looks for.
According to MarketWatch, Morningstar analyst Rick Summer gives LinkedIn a “wide moat” rating. “With a user base that may never leave, this wide-moat firm owns one of the stickiest and most differentiable platforms in social networking”, Summer added.
Buffet is reputed to have three trays marked In, Out and Too Hard and as a rule, he invests in companies that are easy to understand. This makes LinkedIn an ideal target for Buffet type investing. The long proven profit abilities evident at LinkedIn coupled with a huge member base, which has grown by 23% to 364 million, is a further attraction.
Added to this, are recent purchases by LinkedIn – Bizo, which will help companies market business-to-business on LinkedIn while the acquisition of Lynda.com offers libraries of training videos that will attract more users to the LinkedIn site.
There is no change in management in the offing with CEO Jeff Weiner having shown solid growth at LinkedIn since 2009. Co-founder Reid Hoffman is still the chair of LinkedIn and while his voting power gives him absolute control, this might not be a negative as the effectiveness of founder control has been shown to work at Amazon, Facebook and Google.
LinkedIn has become a global player with 40% of its revenue coming from outside the U.S. The global reach, coupled with a new push by CEO Jeff Weiner into China remaining a top priority, Warren Buffett is sure to take a closer look at LinkedIn.
Finally, Goldman Sachs sees a 12 month target price of $275 for this stock which closed at $217.15 by the close of business on Monday.