LinkedIn (LNKD), which operates the world’s largest online professional network, has been a major laggard in 2014, with the stock off about nearly 29%. This is in contrast with a stellar performance since its IPO. LinkedIn stock has gained nearly 350% since its IPO at $45.
So what’s stalling LinkedIn stock?
First of all, a key part of the drop has been the big selloff in momentum operators, such as Yelp (YELP), Twitter (TWTR) and Pandora (P). Investors have been rotating out of hot growth stocks and into value plays, such as Oracle (ORCL) and Microsoft (MSFT).
Yet LinkedIn stock has had its own issues as well. Perhaps the most notable is the deceleration in growth. In the latest quarter, LNKD posted revenues of 46% to $473 million. However, the company’s full-year guidance expects growth of only 36%. That means growth will continue to decelerate throughout 2014, which is especially bad when you consider that LNKD was posting revenue growth of 80% just two years ago.
The slowdown has happened even though the company has multiple revenue streams, such as recruitment, advertising, marketing and premium subscriptions. But it looks like it is far from easy to sell solutions to corporate customers. And, when it comes to finding top-notch talent, online approaches may be a small part of the success. Let’s face it, recruiting is often about real-world networking.
Actually, the recruiting segment accounts for about half of LinkedIn’s revenues. But in the latest quarter, the increase was down to 50% — down from 80% a year earlier.
LinkedIn also continues to lose money — and Wall Street is losing its patience. After more than a decade, shouldn’t it be cranking out profits by now?
Perhaps, but the company doesn’t seem to care. For the most part, the focus is still on top-line growth and this means making substantial expenditures on infrastructure. For example, LNKD has been aggressive with its moves into China, which has an addressable market of 140 million professional users. Keep in mind that LinkedIn’s current user base is roughly 300 million.
Even with the recent plunge in LinkedIn stock, the valuation is still pricey. The forward price-to-earnings ratio is about 62. But of course, there are many other top tech companies that are far cheaper. One example is Apple (AAPL), whose forward PE ratio is a mere 13. Or look at Facebook’s (FB), which has a multiple of 35.
Granted, LNKD is still a great company. It has become the top-of-mind brand for professional networking. The company should also benefit from expansion into foreign markets. Again, China looks like a great prospect. Right now, LinkedIn is still in the beginning stages, with about 4 million registered users.
However, these efforts will take time to get traction and will require substantial investments. The same was the case in the U.S — LNKD waited several years until it got aggressive with monetization, so as not to alienate users.
So with growth lagging and LinkedIn stock still at a hefty valuation, it is probably not a good idea to buy in now. At the same time, Wall Street appears to be focusing more on profits anyway — at least for now. In other words, there’s a good chance that LNKD’s woes will to continue, putting pressure on the stock.
For more of my thoughts on LinkedIn Stock:
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.