After a near 50% decline this year, it’s obvious that there are a lot of problems for LinkedIn Corp (LNKD). Still, online tech stocks have proven to be great investment opportunities for investors who can buy them beaten down.
As a result, some might gravitate to LNKD, but that would be a big mistake.
Just about every major research firm has downgraded LNKD stock over the last few months. The big takeaway from researchers is that LinkedIn’s user base has peaked, as has its means to produce revenue growth.
Earlier this month MKM said that job postings on LinkedIn are no longer growing, and the firm believes that postings during the first quarter will show its first ever decline.
A couple days following this note, Evercore shared a similar sentiment towards LNKD. However, Evercore added that LinkedIn’s need to increase spending on infrastructure to play “catch up” is going to weigh on margins, and that LinkedIn has a tough mountain to climb given that its user engagement is just a fraction of other social platforms.
So when you consider that the unique products LinkedIn uses to create revenue are starting to crumble along with its inability to become a legitimate advertising contender due to poor user engagement, it is easy to conclude that LinkedIn’s days of rapid growth are long behind it.
The Biggest Problem With Owning LNKD
According to a former employee’s blog post, 62.5% of LinedIn’s revenue is based on the premise that users keep their profile updated. If companies are posting jobs, and members aren’t updating their profiles, then it is hard to imagine that LinkedIn crawls out of this dark tunnel any time soon, if ever.
That said, a lack of growth is not LinkedIn stock’s biggest problem. The fact is that technology companies can be great investments, even with limited growth. The key is that such companies must be priced right, and profitable enough to pay dividends and buyback stock.
And that’s the biggest problem for LNKD stock right now. Even after its horrendous year, the stock is still trading at 30 times its expected fiscal year 2017 earnings per share, and 38 times this year’s expected earnings. Therefore, LNKD is not cheap, but rather quite expensive.
Furthermore, LNKD is not profitable enough to pay those big dividends or buybacks that attract investors to slow-growing technology companies. In fact, it has an operating margin of negative 4% over the last 12-months, a significant decline from years past. In 2014, LNKD had an operating margin of 1.6% and then in 2013 it was 3.1%. LinkedIn’s operating margin has steadily declined as costs have soared.
As a result, LinkedIn stock does not really have anything to offer shareholders. It cannot guarantee long-term growth like Facebook Inc (FB) or Twitter Inc (TWTR), and it does not have the high margin or shareholder-friendly incentives like an Apple Inc. (AAPL) or Microsoft Corporation (MSFT).
Therefore, if the problems noted by analysts are further confirmed when LNKD reports earnings on Thursday, investors will be best suited by not trying to buy the bottom, and to avoid LNKD altogether.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.
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