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By Jason Stipp | 05-19-2011 01:50 PM

Investors Over-Connected to LinkedIn Stock

We think the professional networking site has a narrow moat and strong prospects, but the current share price is beyond stretched.

Jason Stipp: I am Jason Stipp for Morningstar.

LinkedIn had an IPO that started with a bang--up at one point a 135%. Investors obviously very excited about this company, but what is the real quality of the business and what is it actually worth?

I am here today with Paul Larson. He is an equity strategist and editor of Morningstar StockInvestor. He is going to dig into the details a little bit and give us his take on LinkedIn.

Thanks for joining me, Paul.

Paul Larson: Thanks for having me.

Stipp: The first question for you: Before we even talk about the stock price, I know the stock price is what's on everyone's mind today because it's just such a powerful runup, but before we even talk about that, I want to talk about the business of LinkedIn. It's got a narrow moat. What's behind that?

Larson: It is a good business at LinkedIn, and we do think it has an economic moat, a narrow moat at this point in time, and it's basically the network effect. And this is an effect where when you have a network, the value of the network grows exponentially with each node that you add to the network, and LinkedIn basically has that critical mass of people using the site, posting their professional information, and they are far and away the largest site in terms of users posting this sort of information, and they have that network effect, that critical mass that no one else is anywhere close to having.

Stipp: So I want to talk a little bit about some of their competitors, because Facebook also has a similar network effect of people putting profile information in there and having connections and being able to chat with each other, and check each others' profiles. Is Facebook a competitive threat here?

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