LinkedIn Won’t Touch $300: The Ifs, Ands & Buts

LNKD has already telegraphed a slowdown. Whaddya expect?

   
LinkedIn Won’t Touch $300: The Ifs, Ands & Buts

Happy belated birthday, LinkedIn (NYSE:LNKD)!

It might come as a shock to some of you that this big social media name just celebrated its 10th year of existence (it doesn’t look a day over 5!), but it did indeed. Born on May 5, 2003, LNKD actually is older than the most ubiquitous of social media names, Facebook (NASDAQ:FB), which popped out early the following year.

Both companies revolutionized their slices of the world — LNKD in the business side of social, with Facebook on the … well, more social side — but their stocks couldn’t be any more different. While Facebook has only partially recovered from its botched offering and still sits well below its $38 offering price, LNKD has quadrupled from its IPO price of $45, including a nearly 70% run in the past 52 weeks.

A repeat performance would take LNKD into the $300s by May of next year, but I don’t see that happening. Personally, I think LinkedIn will fall well short …

If …

Telegraphed warnings hold true: LinkedIn management issued fiscal 2013 figures that have scared the bejesus out of a lot of investors.

After screaming revenue growth of 300% between FY2010-12, LNKD is suggesting a slowdown, estimating lethargic Q2 revenue growth of 1% to $347 million, a mark that falls shy of analyst forecasts for $360 million. Full-year 2013 sales are expected to improve a bit more briskly — around 50% better to a range of $1.43 billion to $1.46 billion — but that too is shy of Street estimates for $1.49 billion.

LinkedIn also fell flat on earnings expectations, projecting full-year EBITDA of $330 million to $345 million vs. expectations for $363 million.

That’s because in addition to a revenue slowdown, LNKD also is spending more money to build out. Capital expenditures have grown almost 150% in the past three years, topping out at $125 million last year. The trend continued in Q1 2013 as capex hit $44 million — double the previous quarter’s expenditures and 170% more than in Q1 2012.

At least to this point, LinkedIn has kept sales and general expenses in check, with Q1 2013′s figure at around 34% of sales, unchanged from the year-ago period. But I’m not sure it can keep holding the line. LNKD’s 2012 annual report warned that the company is looking to continue international expansion and add to its stable of field sales representatives. While no specifics were given, one can reasonably expect an uptick in SG&A over the next few quarters as LinkedIn expands.

Needless to say, LNKD shareholders — weighing a sky-high valuation vs. slower growth and potentially shrinking margins — were a little alarmed. LinkedIn stock dropped nearly 15% on the announcement, and unsurprisingly so considering how hot the stock has been since coming public. Investors should expect the same violent reaction should LinkedIn toss out any similar suggestions in the future.

And …

Competition Heats Up: The online social networking market isn’t just LinkedIn and Facebook. Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL), as well as countless smaller players, are gunning for your attention.

LNKD admittedly has a niche in that world — it’s a career placement and recruiting mecca — but the company itself has acknowledged that any one of the aforementioned heavyweights could develop competing products and solutions. Data is king, and as these companies obtain more and more of it, they’re trying to find new ways to deliver it to users.

There are established players already in the market, including CareerBuilder, Monster Worldwide (NYSE:MWW) and Indeed.com — none offering the level of services provided by LinkedIn. Also, there’s BranchOut — a company that leverages Facebook for a similar experience.

And it’d be foolish to assume Google and the other tech bigs aren’t working on one (or considering buying out smaller competitors). Should that happen, that could rattle LinkedIn shareholders, too.

But …

If the Economy Improves: You can’t discount the bigger picture. As the U.S. economy improves, we theoretically should see a growing need for labor. Simply put: More employers and headhunters should lead to more revenue.

That’s good, considering the company already claims it signs up two new users every second, and has a headcount of more than 218 million users (as of the end of Q1 2013).

And the Company Keeps Innovating: Providing new products and services is another big step in improving its user base. In the first quarter, LinkedIn introduced a new version of its search that will streamline the links across people, geography and similar companies. Initial reports from LinkedIn suggest the platform is driving more traffic within the site.

It also added some business mega-stars to its Influencers platform, which was launched in late 2012. The site contains original content from business leaders like New York City Mayor Michael Bloomberg, former General Electric (NYSE:GE) CEO Jack Welch and current Hewlett-Packard (NYSE:HPQ) CEO Meg Whitman. Users can provide feedback via comments, or share the words of wisdom within their own ecosystem of contacts. While no numbers are available for future conjecture, Sir Richard Branson, CEO of Virgin Media (NASDAQ:VMED), recently became the first of the Influencers to reach the 1 million-follower milestone.

Lastly, a move to mobile could be a critical link for future growth. In late 2012, LNKD rolled out several new apps for its mobile platform, including Contacts, a new app for its contact management systems. More recently, LNKD announced a new mobile phone application for both Android and iOS based systems. Needless to say, as humans go increasingly mobile, those who can most effectively leverage the space will be the victors.

The Verdict

Acknowledging a problem up front is a nice way to start the process of lowering expectations, and that’s exactly what LinkedIn did. Revenues won’t be as robust as Wall Street is accustomed to. Neither will earnings.

If you forget that it’s LinkedIn for a moment, and merely focused on these issues, would a triple-digit P/E worry you? Probably. But even if you add back in the LinkedIn name … well, the company that couldn’t do any wrong suddenly isn’t doing things as right as you’d like.

None of this is to say that LinkedIn has hit a wall, but rampant returns — and especially another 70% tear in 365 days — are likelier than not a thing of the past.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he does not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/05/lnkd-can-break-through-to-200-if-and-but-lmkd-fb/.

©2014 InvestorPlace Media, LLC

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