- LinkedIn’s revenue guidance indicates a slowdown in growth.
- LinkedIn’s profit margins could be squeezed by investments for growth.
- LinkedIn has potential but remains expensive at its current valuations.
Professional networking site LinkedIn (NYSE:LNKD) is headed for exciting times as it reports Q1 2014 earnings on 2 May 2014. The company recently made its foray into China with a local language site, the progress of which will be tracked closely by analysts and competitors alike. However, China is a longer term goal. For now, all eyes will be on LinkedIn’s revenue in Q1 following the disappointing revenue guidance issued last quarter. We like LinkedIn as a business, but we think the stock is overvalued.
Earnings Guidance & Estimates
LinkedIn’s revenue guidance pegs Q1 revenue at $455 - 460 million implying a marginally slower YoY (over Q1 2013) growth rate of 40 - 42% vs 44% in Q4 2013.
Analyst Estimates for LinkedIn - Average: $467 million. Range: $458 - 486 million.
One must note that LinkedIn’s revenue guidance has traditionally been lower than estimates and it has always beaten estimates over the last 8 quarters.
The FY 2014 revenue guidance of $2020 - 2050 million indicated a marginal decline in absolute revenue growth in FY 2014 vs FY 2013. Given that it was the big disappointment in the guidance, it will be interesting to see if any revision is made on that front.
LinkedIn Financial Performance and Key Metrics
LinkedIn has recorded a slowdown in YoY growth rates over the last 2 years, slowing to 44% in Q4 2013 from over 100% in Q4 2011. However, its current growth rate remains healthy.
As far as profitability goes, LinkedIn’s average operating profit margins and net profit margins over the last 12 quarters have been about 11% and 5% respectively. With heavy investments slated for its Chinese foray, it’s likely that profit margins will come under pressure.
Broadly, so far, LinkedIn has shown the ability to grow at a healthy rate and still make profits.
LinkedIn’s user base has been growing. However, the number that investors should look at is active member base. QuantCast data shows that LinkedIn has seen a drop in the number of active members. That said, a drop in the proportion of active users is expected as the user base keeps growing.
Further, LinkedIn has been able to compensate for the loss of active members with a healthy improvement in user monetization rates. Over the last 8 quarters, the average growth in monetization rate has been 35% thus driving revenue growth.
User engagement has been an element LinkedIn has been constantly working on. The acquisition of Pulse has helped the site add richer content. On the business front, improved retention rates on its premium subscription and strong growth (49% in Q4 2013) in its corporate customer base are positives.
China Won’t Be A Factor In Q1 Earnings!
The opportunity in China has the potential to add about 140 million users to LinkedIn’s tally. However, the addition will happen over the coming years and could account for 25% of the user base and about 3% of the company’s revenue by 2017. But one would do well not to take aspirations for granted, given the fate of LinkedIn’s peers in China.
As far as FY 2014 is concerned, the site is yet to be rolled out to the public, and contributions to user base and revenue will be minimal. In our detailed article about LinkedIn’s prospects in China, we cover the impact on user base, revenue and the risks the company will encounter in the land of the dragon.
LinkedIn needs to ward off fears about a slowdown in revenue growth that have cropped up following its revenue guidance for Q1 2014. Improvement in monetization rates and sustained fast paced growth in the APAC region (even excluding China) could serve as additional positives.
However, profitability is not likely to improve in the near term, and potential growth from China, will only come through in the long term, if it does. Despite the recent correction in its stock price, LinkedIn is expensive at current valuations with a PE ratio of close to 800. View our Linkedin stock analysis
Also read: Twitter Q1 2014 Earnings Preview
To see LinkedIn’s latest stock price movement, click here (NYSE:LNKD)