Whether the second-quarter earnings report LinkedIn (LNKD) posted Thursday afternoon was encouraging or discouraging is largely a matter of perspective. The fact that LNKD stock was down nearly 10% early on Friday clearly shows the majority of the trading crows saw the glass as half-empty. Yet, for those who understand that LNKD is a work in progress, the selloff spurred by the LinkedIn earnings report (and guidance) may actually be a buying opportunity.
And, therein lies the rub…what to make of LNKD stock in the midst of an alarming slowdown in its growth rates, yet against a backdrop of a savvy shift in its strategy.
For investors caught and the middle and unsure what to make of LNKD in light of Thursday’s news and Friday’s drubbing, first and foremost, pick a timeframe and prepare to stick to it.
LinkedIn Earnings, By the Numbers
Last quarter, LinkedIn earned 55 cents per share on $711.7 million in revenue. Both figures pretty well trounced estimates. The pros were only looking for a profit of 30 cents per share of LNKD stock, and revenue of $680 million. Better yet, the top line for the second quarter of this year left the Q2-2014 total of $533.88 million in the dust, while the bottom line of 55 cents per share firmly surpassed the year-ago figure of 51 cents per share.
The LinkedIn earnings figures for Q2, in and of themselves, were clearly solid. Investors balked, however, after some of the more relevant metrics showed disappointing trends, and in the shadow of guidance that was only positive because of an acquisition.
LinkedIn now expects a 2015 top line of $2.94 billion, versus analyst estimates of $2.91 billion. But, all of that improvement — and more — is expected to stem from its recent acquisition of online skill-teaching and training service Lynda.com.
Previously, LinkedIn had reported Lynda.com would add $40 million to its 2015 top line. Now, that accretive upside is expected reach $90 million this year. Being more than prior analyst predictions had built into 2015’s outlooks, the $50 million differential actually implies LinkedIn’s core business is shrinking.
It’s a premise that’s underscored by other data. Display ad revenue, for instance, fell 30% on a year-over-year basis in the second quarter, versus only a 10% lull for the first quarter. Meanwhile, though memberships in the professional networking site were up 21% from Q2-2014, reaching 380 million; the total number of members was about even with the first quarter’s total.
All told, the company now expects a 2015 profit of $2.19 per share, versus analyst estimates for earnings of only $1.93 per share of LNKD stock. That figure of $2.19 per share, however, is still less than the $2.95 the company offered as guidance in early February.
The Rest of the Story
Admittedly, it’s a troubling trend for faithful owners of LNKD stock; the organization seems to be doing less and less, with more and more. There’s a method to the madness, though, and it may well be worth the wait.
Last quarter, LinkedIn’s expenses soared 52% to $792.9 million (yes, the company spent more than it took in) as it works toward become a leaner, tougher, more relevant hub for both employers and employees.
Aside from the Lynda.com acquisition, LinkedIn has grown its sales force in recent quarters, not to mention ramped up its research and development spending. It’s also in the midst of reorganizing itself so it can better attract and retain corporate recruiters, and of course, figuring out how to win in an increasingly mobile world.
Last quarter, more than half of those who visited the LinkedIn website did so from a mobile device, which not only doesn’t lend itself to a robust display ad business, but may not prompt as much activity as would be otherwise inspired on a desktop or laptop. Adjustments are being made for mobile users as well as desktop users. The company is sending fewer promotional e-mails to members, for starters.
Then there’s China. Though LinkedIn only boasts 10 million Chinese members now, that’s well up from the 4 million China-based members the site had in February 2014 before it began promoting itself to that market.
These are all initiatives that should yield results. But, they take money. More than that, though, they take time to get traction. That said, the fruits of the labor and spending could start to appear as early as next year, if not sooner.
Bottom Line for LNKD Stock
Sometimes it’s tough to distinguish between short-term noise and long-term potential. But, in the wake of the LinkedIn earnings report, it’s something investors are going to have to figure out how to do.
It’s also well worth the effort with LNKD, according to some professionals.
Monness Crespi Hardt & Co. analyst James Cakmak may have summed up the situation best, and simplest, by saying “[LinkedIn is] navigating through some temporary hiccups that they should be able to put behind them… it’s one of the most compelling investment opportunities in the Internet space right now.”
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
