The Market Ticker
Commentary on The Capital Markets- Category [Market Musings]

LinkedIn has seen quite a run of late in its stock price.

I killed my profile there a couple of years ago because the company was famous for spamming me, literally on a daily basis, with dozens of so-called "I want to add you to my professional network" invites.

Virtually every single one of these was identical down to the last letter.

In other words, exactly none of these were actually people asking me to be part of their network.

No, they were spam.  They were LinkedIn scanning someone's email address book and, finding my email address in there, sending me said "invitation" unsolicited.

How does LinkedIn get around the anti-spamming laws?  You "opted in" when you created an account.

But here's the thing -- all of these so-called "connections" that LinkedIn claims they have "found" for you which forms the entire predicate on which the firm has any value whatsoever, are false.

I might have exchanged emails with 30 or 50% of these people over the last few years, but I can literally count the number of them that I actually know in a contemporary professional context on the fingers of my hands.

It gets worse -- once you have "confirmed" such a person as a member of your "network" they then can "endorse" you for various skills and experience.  And you will be endorsed for same -- by people with utterly no professional basis to make such a claim.

Why do I bring this up now?  Beyond the outrageous ramp-job in LinkedIn's share price I recently got one of these "invitations" even though I didn't have a LinkedIn profile from someone who I really do know.  I thought perhaps that was "real", so I turned a profile back on -- and within hours I got dozens of additional "add me to my network" requests.

Folks, you gotta be kidding me.  And let me be quite clear -- any so-called "generic" invitation from people in general will get ash-canned immediately.  I have no purpose in trying to establish a brag list of people who I allegedly "am networked with" via this or any other form of "social media."

Further, if you got (or receive in the future) such an "invitation" from me you didn't get it as a result of my letting LinkedIn have access to my address book because I not only didn't give it to them they can't get it via third parties as there is only one place it resides -- on my servers, resting on encrypted storage.  I assure you I also did not go through a list of "potential" connections and click the "invite" button either; if you ever see such an invitation from me it will be unmistakably customized so you know I personally sent it.

This is a company selling at 15x sales and over 60 times projected forward earnings -- and which has a current posted EPS loss, all built on the predicate of spamming people (for real -- these are unsolicited emails both from the standpoint of the recipient and alleged sender) to "build their professional networks."

But there's no bubble in Nasdaq and the market in general, they say.

Uh huh.

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I've written on this before in terms of specific companies, but this Ticker is not about any one specific firm.

Rather, it's about a rather nasty (but legal, at least at this point) practice that appears to be all the rage among a fairly material number of companies, especially those in the "tech", "media" and "social" spaces.

All of these sorts of firms have very heavy costs associated with technology in one form or another.  The traditional way to deal with rapidly-escalating capital cost requirements is through leasing of some form (although it's not always called leasing, particularly when we're talking about things that will not hurt you if you drop them on your foot, usually because there's nothing to drop.)

The problem is that these "expenses" are not being recognized when contracted for, but rather only when actually consumed.  That is, these "contracted for" but not yet consumed services and goods are being held off-balance sheet and yet they are contractual obligations of the firm in question!

As far as I can determine this is legal but god-awful misleading.  It is my position that if it quacks like a debt and contracts like a debt it is a debt, which means it should be recognized on the balance sheet as a long-term liability (like a debt.)

The problem with not doing this comes down the road; that particular obligation is very-much real and will be required to be serviced in coming quarters and years.  If you took that obligation onto the balance sheet at the signing of said contract and then retired it as the contract was performed I argue you'd get a much more-accurate view of the firm's financial health -- including a means of discounting future cash flow (which, incidentally, is one of the necessary things to know in order to value a stock!)

This is almost-universally not being done and the result is that utterly-enormous future obligations are for all intents and purposes not represented in the balance sheet.

You could quite-easily argue that this bit of financial engineering is simply about pumping a firm's stock price, and you'd probably be correct.  But from an investor's perspective this sort of game is extremely dangerous because when (not if) the cash flow constraint is exposed the price of the firm's stock is subject to a huge and rapid haircut as expectations for future cash flow get reset back to reality.

My point here is quite simple: The market is vulnerable on a broad basis in this regard as many of the "high flyers" are using this sort of technique.  If you're holding individual equities you need to take a very close look at the financials, including the footnotes, to see exactly what sort of exposure you have to this.

You're unlikely to like what you find.

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