Sell Apple to buy LinkedIn

Sell Apple to buy LinkedIn 

By John Shinal 

SAN FRANCISCO (MarketWatch) -- Regular readers of this column know that I don't typically tout any tech stocks. I'm not a trader and don't own individual shares of companies, so it's not my job (as I see it) to tell you to buy this or sell that.

As a journalist, what I try to do is give investors as much information about tech companies as I can dig up, then present it so you can make your own informed decisions.

Most of the time, I present the information in a skeptical way, for two good reasons.

First, there's a rather large investment industry out there -- employing tens of thousands of people and managing trillions of dollars -- designed with the sole purpose of selling stocks. If you want to find someone to tell you which tech stocks to buy, you won't have to look far. Adding to that din doesn't seem to be a good use of your time, or of mine.

Second, in early 2002, after watching the tech-stock bubble burst and take $7 trillion in investor cash with it, I vowed that in the future, whenever I had to choose between touting the next big thing in Silicon Valley or trying to find holes in the story, I'd be better serving readers by doing the latter.

Here's why: Even though I had written some of the earliest and hardest-hitting stories on Cisco Systems Inc. (CSCO, Trade ) when I worked for Business Week magazine at the height of the bubble, I and/or my editors had backed away from hitting even harder several times.

Throughout 1999 and 2000, it wasn't easy to write that Cisco's growth model -- which depended on snapping up smaller networking firms -- was doomed if the stock it used as currency to pay for those acquisitions stopped rising. I had one editor at that publication, whose opinion I respected and still do, tell me that the magazine had written such a story two years earlier and had gotten shredded for it, by Cisco's PR machine as well as by investors, when the stock doubled and then doubled again.

So when I was writing for another publication in 2004 about how big the Google Inc. (GOOG, Trade ) IPO would be, I insisted to my editors that we include as much skeptical information as we could, including quotes and facts that demonstrated how IPO shares, on average, tend to underperform stock markets over the long term.

Google was an exception, of course, and those who bought it with both fists during its first days, weeks and months as a public issue were rewarded with handsome gains.

All of the above is a necessary preface for what I'm about to do, which is break my own rule and offer some straightforward investment advice: If you own Apple Inc. (AAPL, Trade ) and you're a trader (by which I mean you don't mind taking profits off the table and paying the taxes on them) rather than a buy-and-hold investor, I believe there's a strong case to be made right now to take a good chunk of those profits and plow them into shares of LinkedIn Corp. (LNKD, Trade )

When people start talking about market caps in the neighborhood of a trillion dollars to justify expectations that a stock still has a multiple or two left in it, you might want to think seriously about taking some money out.

I've heard all the bullish arguments for Apple -- that it's got the best technology in the fast-growing smartphone market; that the iPhone and iPad are pulling more potential Mac buyers into stores; and that it has so much momentum the company won't miss a beat, even if Steve Jobs never returns from his medical leave.

I agree with this, for the most part. But no stock goes up forever, and Apple already has had a tremendous seven-year run. Eventually, even Jobs's Midas touch can't conquer the law of large numbers, and at a $312 billion market cap, Apple is carrying around a very large number. It may yet pass Exxon Mobil Corp. (XOM, Trade ) to claim the top spot, but buying or holding a company at or near the top of a run isn't a prudent investment strategy.

The same expectations were baked into Cisco shares in early 2000. On March 28 of that epic year, Cisco closed with a market cap of $555 billion, surpassing Microsoft Corp. (MSFT, Trade ) to become the world's most-valued public company.

Call me a prisoner of history, but history wasn't kind to those who tried to squeeze the last bits of profit out of Cisco's long bull run. Now, 11 years later, Cisco is worth $91 billion, or about one-sixth its market peak.

As Google's post-IPO run proved, investors didn't have to own the shares the first day, or even the first week, to make good money on the stock.

Here's why I think LinkedIn has room to run: Technology investors are hungry for growth stories, but only if the story is a profitable one.

The fact that Skype, which hasn't figured out a way to turn a profit after seven years of trying, couldn't get its IPO out tells me that professional money managers are disciplined enough not to throw money at eye-popping, top-line growth.

That means there's more dry powder to buy issues that are profitable, like LinkedIn's.

Second, LinkedIn is benefiting from a trend that is getting started. Just as Facebook is benefiting from the growing number of companies using its social network to look for consumers, LinkedIn is benefiting as companies use its service to find potential workers.

The company sits in the sweet spot of a huge shift in how companies find job candidates. In my last job as a reporter for the Wall Street Journal Digital Network's FINS career site, I spent seven months calling at least one tech chief executive or head of human resources every day. 

When I asked them where they were finding workers, without exception every one of them mentioned LinkedIn as a source of candidates.

Here's a quote typical of what I heard during that time: "LinkedIn is extremely useful for hiring. When you're growing as fast as we are, you can't know everyone," said Eric Olden, chief executive of Symplified, a Boulder, Colo.-based maker of software that manages and secures cloud-based networks.

There are tens of thousands of companies like Olden's that are going to be willing to pay to find people on LinkedIn.

Third, the type of user the site attracts -- professional business users -- is an audience that's attractive to paying advertisers. Facebook may have more members, but those people spend their time, for the most part, socializing rather than getting to business.

I don't know whether Facebook is worth $50 billion, as some trading in private markets believe, or double that or half as much. But if it's worth any of those, LinkedIn is worth more than its current valuation of $9.5 billion.

I'm usually not one to jump on a new bandwagon, but if you look at the risk/reward profile of LinkedIn right now -vis Apple, it's a two-part trade worth considering.

Good luck with your hard-earned money and take all investment advice, including what's in this column, with a grain of salt.