Saturday, May 18, 2013

LinkedIn: Expensive And Unattractive?

Since the beginning of 2012 till the end of April this year, the shares of the leading professional social networking site LinkedIn (NYSE: LNKD) soared rising by nearly 200% as its price-earnings ratio, or P/E, climbed to nearly 1,000. Then it released its results for the first quarter of 2013 which showed strong profit growth but gave lackluster guidance which caused a 13% drop in its stock on Friday, 3rd May. The business has delivered several strong quarters in the past; therefore the markets were expecting greater things from them in the future.
Despite the fall, its P/E is still above 900 but it's not the most expensive social networking stock. LinkedIn also has a unique business model, in which lies the company's competitive advantage.
The current dip has given some respite to LinkedIn's rally. Nonetheless, the stock still shows a rise of 55% for the current year. LinkedIn's shares now trade 128 times its current year's earnings estimate. On the other hand, shares of the leading tech firms such as the internet giant Google (NASDAQ: GOOG) and the world's largest social network Facebook (NASDAQ: FB) trade 18 times and 50 times respectively to their current year's earnings estimate.
LinkedIn's current P/E is still lower as compared to Facebook's 1,800 but, Google's P/E is just 26 while Apple's is 11. In other words, Google and Apple are at least 35 and at most 163 times cheaper than either Facebook or LinkedIn. Although LinkedIn is relatively expensive, but expensive doesn't mean unattractive.
LinkedIn's Earnings
LinkedIn's total members now stand at 225 million, showing an 11.4% increase from last year and almost a 100% increase since its IPO about two years ago.
LinkedIn's sales in the previous quarter increased by 72% to $324.7 million while its net income soared by 352% from last year to $22.6 million. The business is also increasing its focus on mobile as it has recently revamped the smartphone version of its website while it is betting on the mobile newsreader Pulse which it agreed to acquire a few weeks ago for $90 million. Unlike Facebook that has revealed that it earns 30% of its ad-revenue from mobile, LinkedIn has decided to remain silent on the issue. However, the management did provide a number on mobile traffic by saying that 30% of site visits were via mobile apps; the comparable number in the same quarter last year was 19%.
High Expectations
In the current quarter, LinkedIn is expecting sales between $342 million and $347 million, as opposed to analysts' estimate of $359.7 million. The midpoint of this range, i.e. $345 million, would show year-over-year growth of 51% which is significantly lower than what it achieved in the previous quarter. For the full year, LinkedIn is expecting to net revenues between $1.43 billion and $1.46 billion, which is $40 million below market's expectations at its high end.
Why the dip in forecast?
LinkedIn is in the middle of a mobile transformation. As we have seen in the Google's most recent earnings, this shift could cause a slowdown in revenue growth, even if the number of paid clicks increases. The reason is simple, although there would be a greater number of users (coming from mobile) but the mobile ads themselves don't pay out as much as their desktop counterparts. For LinkedIn, I believe that the mobile traffic has increased but the revenues aren't increasing as much as the markets would have liked, hence the slowdown in growth.
However, LinkedIn's business model is more attractive than that of Facebook or Google which primarily rely on the wallets of advertisers. LinkedIn on the other hand gets its bread and butter from advertisers as well as from recruiters and its premium subscribers. The S&P 500 companies use LinkedIn to hunt for talent - and there is no other network out there who could rival LinkedIn. This is the main strength of the business; lots of rich customers and few direct competitors.
LinkedIn's management insists that ad prices are stronger than ever, despite the mobile developments, but I believe this will slowdown, particularly when the mobile page-view growth outpaces PC. Currently, both are around 30%. However, advertising is not what LinkedIn is all about.
In the previous quarter, the talent solutions unit pumped revenues of $184.3 million, showing an 80% year-over-year increase. Ad revenues, its second biggest revenue source, rose 56% to $74.8 million while sales coming from premium subscribers increased 73% to $65.6 million. In essence, its most lucrative area is putting the best growth numbers. The advertising is giving the smallest growth numbers which, as I mentioned earlier, could be because of the move towards mobile.
It is true that LinkedIn's P/E looks extraordinary, but Facebook's is about twice as big. Secondly, LinkedIn has a history of surpassing estimates. With lowering its output, the management has increased the probability of LinkedIn outperforming market's expectations once again.
Stock 6M
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.