Back in 2012, LinkedIn Corp (LNKD) disclosed a security breach that involved about 6.5 million users. Well, interestingly enough, it appears that the estimate was way off the mark. Keep in mind that LNKD now believes the breach has impacted a whopping 117 million users! So it seems like a pretty good bet you’ll get an email from the company to change your password.
OK, so what does this mean for LNKD stock? So far, it seems like Wall Street is not too concerned. Let’s face it, security breaches are just a normal part of the digital world.
Does This Affect LNKD Investors?
Despite this, there should still be some worries for LNKD stock. First of all, the company has thousands of enterprise customers that certainly want to make sure there is sufficient security. Might the massive breach mean that the company is not too disciplined? And why did it take four years to fess up?
There are no answers.
“Security breaches unfortunately have legs — in this case, for years,” said Paul Kraus, who is the CEO and founder of Eastwind Networks. “Hackers driven by monetary gain continue to benefit from nefarious tactics that take advantage of a public that believes it’s immune to cybersecurity risk as well as companies that place the onus of best security practices on its users. LinkedIn is now recognizing it’s going to need to be more aggressive in implementing password resets and other security protocols to protect the majority of its users.”
Although, the biggest worry for holders of LNKD stock is that the resetting of 117 million passwords could put a dint in user engagement. After all, might some of them just not do it? It seems reasonable.
And even worse, LNKD has been struggling to find ways to boost user engagement. This is why the company recently struck a deal to buy Run Hop Inc., a startup that focuses on news feeds.
According to a recent post from a former LNKD employee: “LinkedIn has forgotten the unique ‘fuel’ that powers the money machine: the members and their willingness to keep their profile up to date. … LinkedIn’s own employees don’t see the value of updating their own LinkedIn profile!”
Oh, and he notes something else that should be absolutely scary for owners of LinkedIn stock — that is, about “62.5% of LNKD’s revenue depends on members keeping their profile up-to-date.”
And all this should be no surprise. What features from LNKD have you liked lately? I haven’t seen any.
Interestingly enough, LNKD may be facing the same situation as Twitter Inc (TWTR), in which there has been a major lack of innovation and excitement.
If anything, LNKD may be vulnerable to competition as well. While there are several startups gunning for the opportunity, the biggest threat is probably Facebook Inc (FB). The company’s Facebook@Work is in the beta stage but it looks like there is already nice traction, such as in India (probably because of the focus on mobile).
No doubt, with the company’s 1.6 billion user base, there could be a notable impact on LNKD.
According to a recent post in BusinessInsider: “Facebook At Work aims to simplify business communication by making its enterprise platform work almost exactly like regular Facebook. Users can toggle between their personal and corporate accounts, and the biggest difference is just that At Work doesn’t have any ads and each company owns its own data (versus the regular social network, where Facebook does).”
Bottom Line on LinkedIn Stock
LinkedIn stock may feel the pressure from macro headwinds. For example, economists from Morgan Stanley (MS) believe that the global economy is full of geopolitical risks, whether from the upcoming U.S. presidential election, the threat of Britain’s breakup with the E.U. or the impeachment of Brazil’s president.
The uncertainty could weigh on consumer sentiment and push down growth, perhaps even leading to a global recession. If so, the impact on LNKD stock could be significant, as a majority of the revenues come from hiring services.
Finally, the earnings reports from LNKD have been volatile. Back in February, the guidance was particularly weak, which tanked the shares by nearly 50%. But then in the following quarterly report, things were much upbeat.
So in light of the macro situation, issues with user engagement and the potential for more competition, it is far from clear what may happen next.
And given that the forward price-to-earnings ratio on LNKD stock is still at a hefty 29X — which would likely be higher when adding back the costs from equity compensation — this is probably not an investment worth engaging in right now.
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.