LinkedIn (LNKD) is the preeminent social media site for professional employees and employers. In recent times, the company has also branched into some adjacent markets such as staffing and specialty marketing.
LNKD stock had been trading in a broad range generally between $200 and $250 per share for the past couple years. That abruptly came to an end following a downbeat earnings report that sent the stock plummeting lower. Many analysts threw in the towel on the company, and there was broad liquidation of LinkedIn stock. Is the growth story over for LinkedIn, or can shares rebound from the wreckage?
LNKD Stock: Pros
Rapid Growth: LinkedIn continues to enjoy soaring revenues. In 2010 the company put up $243 million in sales. This more than doubled to $522 million in 2011, almost doubled to $972 million in 2012, and soared greater than 50% to more than $1.5 billion in 2013.
The pace of growth has slowed a bit in recent years. 2014 brought $2.2 billion in revenues, and 2015 came in at $3 billion. For this year, guidance is at 20-30% growth, which would be an additional $600-$900 million on top of last year’s figure. This is no longer exponential growth, and LNKD stock has taken a hit for that. But it’s still strong.
Higher Margin Business: LinkedIn is not just a low-margin online display ads business. That’s a good thing; internet economics generally favor websites that have other revenue streams in addition to basic advertising.
LinkedIn comes with two main ancillary products. LinkedIn has a more robust targeted advertising arm, Marketing Solutions, that uses its vast database to allow specialized marketing. Like Facebook (FB), there are interesting things you can do when you have a lot of specialized data about users. LinkedIn has previously said this could be a $1 billion business in 2017. LinkedIn is also working on a staffing business. This is another specialized business that offers much more promising margins than just advertising does.
Stock Is Beaten Down: LNKD stock traded at $250 rather recently. It now trades at just $118, a more than 50% decline. The stock dropped more than 40% following the recent lackluster earnings release and cautious forward guidance.
This drop has caused a lot of normally skeptical people to turn bullish on LinkedIn. Among them comes famed short seller Citron Research who is generally known for bashing fraudulent and overvalued companies. But in LinkedIn, it sees value at current prices.
While LinkedIn shares were clearly and arguably rather egregiously overvalued at $250, anything looks a lot more interesting after a 50% decline. LNKD stock is now back to where it traded in 2012, however the company has successfully grown its user base and revenues dramatically during that same timespan.
LNKD Stock: Cons
Hidden Stock Expenses: A skeptic might say LinkedIn is being run to enrich its employees rather than make public shareholders any money. Stock compensation is a large cost at many tech companies, but LinkedIn really takes it to the next level. LNKD stock is getting diluted by truly gargantuan stock awards.
For full-year 2015, the company produced operating cash flow of $807 million and “adjusted” EBITDA of $780 million. However roughly two thirds of this seeming profitability disappeared to employee stock compensation. LNKD spent $510 million on this in 2015.
Stock compensation has the insidious effect of slowly diluting away your ownership. It’s the equivalent of inflation for stockowners. Four years ago, LinkedIn had around 100 million shares outstanding, and now it’s up to 130 million, meaning that there are 30% more shares out than just recently. Paying in stock allows the company to avoid laying out actual cash, but the effect is still harmful for shareholders — every quarter you own less and less of the company, as the share count rises by a million or more shares. One minor plus from the recent collapse in the stock price; the value of those stock awards to employees tumbled.
Weak Financial Metrics: The company is not profitable. It was briefly and only slightly profitable several years back, but things are trending in the wrong direction. Margins are falling.
LNKD stock carried a positive 6% operating margin in 2012. This fell to 3% in 2013, 2% in 2014, and -5% last year. At fault are overhead expenses which have tripled since 2012 and now consume more than half of revenues. This goes along with the previous point: The employees are simply being overpaid compared to the business’ ability to make money.
In addition, the company $1.4 billion in leasing obligations that make the liability side of the balance sheet flimsier than you’d otherwise think.
Market Might Be Limited: LNKD in a way is like Facebook. It benefits from the same network effects and scale. There’s likely to only be one popular site of its type in any particular geography. But while Facebook is very profitable, LinkedIn is not.
I’d offer that there is a simple reason for this. Facebook is an engaging user experience. It’s a great way to waste time with mildly amusing content. LinkedIn on the other hand is a bore. Most people aren’t going to spend time there unless they’re trying to get something particular done; namely finding a new job or a new employee.
Most professionals that are in LinkedIn’s target market probably already have a profile. And there’s not a lot LinkedIn can realistically do to make people want to spend more time on the site.
LinkedIn Stock: Verdict
I would not consider even for a minute going long LNKD stock at current levels. The company’s business metrics are going in the wrong direction. Revenue growth is dramatically slowing, while costs continue to escalate. Margins are falling, and losses are widening. The recent stock price drop offers a trading opportunity for short-term traders, but as a long-term investment I’m still not optimistic on LNKD stock.
The recent repricing of LNKD stock leaves the company in a vulnerable place. It is no longer a sexy growth story, but without profits, it cannot readily attract value investors. It’s stuck in a no man’s land. And employees may be tempted to leave, further harming the company, since the value of their stock compensation suddenly ratcheted down.
At the time of this writing, Ian Bezek had no position in LinkedIn shares. You can reach him on Twitter at @irbezek.