Going into third-quarter earnings Thursday afternoon, LinkedIn (LNKD) was having a rough go of things. Shares were off 5% for the year, and had suffered two consecutive earnings meltdowns.
LinkedIn stock needed desperately to deliver some positives to shareholders, who have been used to seeing shares of the professional social network wallop the S&P ever since it went public in 2011. LNKD is up about 160% in that time, nearly three times the S&P’s 56% return.
Well, shareholders got their wish and then some, as LNKD stock jumped as much as 11% after posting a blowout quarter and raising full-year guidance. With the stock now firmly in the black for the year, let’s take a look at what drove results:
Talent Solutions & Mobile Progress
LNKD posted revenue of $780 million in Q3, up 37% from $568 million a year ago. That easily beat Wall Street estimates, which called for revenue of $755.8 million. Adjusted EPS also trumped consensus figures, clocking in at 78 cents, well above the 46 cents per share analysts expected and up 50% from the 52 cents it earned in the year-ago quarter.
The big kicker, though, was the company’s improved guidance. Last quarter, LNKD stock cratered despite top- and bottom-line beats, all because forward guidance was weak. This quarter, LNKD raised full-year revenue guidance to the $2.975 billion-to-$2.98 billion range, up around $35 million-$40 million from its guidance last quarter.
So, what was the impetus behind LinkedIn’s great quarter?
Unlike other prominent social networks such as Facebook (FB) and Twitter (TWTR), LNKD derives the majority of its revenue from contracts and subscriptions, rather than advertising. The ad-driven part of its business, Marketing Solutions, drove just $140 million — or 18% — of LinkedIn’s $780 million in third-quarter revenue.
Talent Solutions, the enterprise-facing division that helps connect employers with qualified candidates, saw revenue increase 46% year over year. That division hauled in $502 million, or 64% of overall revenue last quarter. Its results were boosted, however, by the inclusion of lynda.com, a paid video tutorial platform LNKD bought back in April for $1.5 billion.
Lynda.com hauled in $41 million in revenue in Q3, more than double the $17.5 million it took in in Q2.
And of course, a tech company in 2015 can’t go a day without touting the importance of mobile, and LNKD did not disappoint. From the earnings press release, “Mobile continues to grow at double the rate of overall member activity, and now represents 55% of all traffic to LinkedIn.”
Those mobile traffic numbers were up from 53% in Q2.
Caveat Emptor
Before instinctively piling into LNKD stock after its great quarter and positive guidance, remember that there are a few, rather serious-looking risk factors to consider.
First, LNKD still isn’t profitable on a GAAP basis, which includes stock-based compensation and one-time costs. In fact, its GAAP loss expanded significantly, from 3 cents per share a year ago to 31 cents per share in the most recent quarter.
Second, what happens if the job market suddenly softens? When LinkedIn went public in May 2011, the unemployment rate sat at 9.0%. Today, it’s 5.1%. Clearly, that sort of dramatic improvement in the labor market won’t happen over the next four years. In fact, it may only happen once or twice in the next four decades.
Last, but certainly not least, LNKD stock trades at a lofty valuation of 68 times forward earnings and 11 times sales. It will need to continue delivering meaningful growth for years to come to grow into that valuation.
I congratulate LNKD on a solid quarter, but remain wary of go-go growth stocks reliant on the job market for success.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
