by Tom Taulli | November 22, 2013 12:00 pm
Since coming public in May 2011, LinkedIn (LNKD) has not only grown at a hefty pace but has consistently beat Wall Street expectations. The result? LNKD stock has been soaring. In the past year alone, LinkedIn stock is up 113%.
But in the latest LinkedIn earnings report, there was trouble. Sure, LNKD beat expectations once again. But the company’s outlook was a bit weak. So inevitably, LNKD stock took a hit.
Is this a sign of more problems to come … or will LinkedIn stock keep up its winning ways? To see, let’s take a look at the pros and cons of buying LNKD shares:
Professional Social Networking. One tailwind for LinkedIn stock is the fact that LNKD is the clear leader in this space, with over 259 million registered users — up 38% during the latest quarter. About 66% of them are in other countries. Interestingly enough, LNKD has become the New Age resume. But the company is making savvy moves to keep up the user growth, such as with University Pages. This initiative is focused on getting students to sign up. In fact, in the first two months of the launch, there are already 1,500 University Pages across more than 60 countries. At the same time, LNKD has invested heavily in providing more value-add services to help users with their careers. These efforts have included content from thought leaders like Richard Branson.
Business Model. LinkedIn has three core sources of revenue: Hiring Solutions, Marketing and Premium Memberships. This is in contrast to many other social operators, which generally rely on advertising revenues. Of the LNKD revenues streams, Hiring Solutions continues to be the key money-maker. For the most part, employers have found it an effective way to recruit qualified white-collar workers.
Mobile. LNKD emerged during the era of Web 2.0. But when the market rapidly moved towards mobile, it was a laggard. Yet with acquisitions — such as for Pulse, which is a newsreader for tablets — and bigger investments in engineering, LinkedIn has been able to improve its offerings, and that has helped LNKD stock. One interesting new app integrates into a user’s email, such as Google’s (GOOG) Gmail, Apple’s (AAPL) iCloud and Yahoo (YHOO) Mail. It includes a link to a profile from a sender’s message, which can provide nice opportunities for sales and business development. The LNKD app could also be a smart way to get a piece of the valuable customer relationship management (CRM) market, which is currently dominated by Salesforce.com (CRM).
Growth. This has been the fuel for LNKD stock. But during the latest LinkedIn earnings report, investors got a jolt when the Q4 forecast was tepid. The result: LinkedIn stock fell by nearly 10% within two days. LNKD pegged revenues at about $415 million to $420 million, translating into a growth rate of 37% to 38%. This was below the consensus estimate of LNKD stock analysts, who had $438.9 million slated. Keep in mind that Q3 growth was 56%.
Valuation. The valuation for LinkedIn stock is at nosebleed levels. Consider that the forward price-to-earnings ratio on LNKD is at a steep 99x, which compares to 41x for Facebook (FB). Plus, GOOG stock is trading at only 19x and AAPL stock is a mere 10x. The problem is that LNKD stock investors have been assuming that the growth for the company will somehow continue unabated. But if the recent slowdown is not temporary, LinkedIn stock could still be vulnerable.
User Experience. If you take a look at the LinkedIn site, you’ll certainly notice it has become much busier in terms of the scrolling content and ads. The same goes for the mobile apps. While LNKD is trying to find ways to boost engagement and monetization, there will be risks. If the company gets too aggressive, it may ultimately alienate its users.
LNKD stock definitely has a lot going for it, including a solid business with three strong revenue streams. It also has a commanding lead against its competition.
But as the revenue base gets larger, it will likely get tougher to keep up its high-growth rate. As seen with other high-fliers, like Groupon (GRPN) and Zynga (ZNGA), the valuation of a stock can get hit hard when this happens.
And with LNKD stock trading at such a high multiple, it really looks like Wall Street’s growth expectations are out-of-whack.
So should you buy LinkedIn stock? Not at these levels; it’s simply too risky.
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.
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