- LinkedIn beats its own revenue guidance as well as analyst estimates.
- LinkedIn FY 2014 guidance makes investors unhappy.
- LinkedIn stock is overvalued.
LinkedIn’s (NYSE:LNKD) Q4 earnings announcement on the 6th of Feb 2013, was followed by an 8.5% fall in its stock price. While the company’s Q4 performance and FY 2013 numbers didn't cause the flutter, its Q1 2014 and FY 2014 guidance definitely did. Let’s take a look at how the numbers stacked up and what spooked the investors. We discuss where LinkedIn's stock price should be headed and why, along with the positives and negatives that come out of its Q4 2013 results.
LinkedIn’s Q4 2013 revenue beat both, its own guidance as well as analyst estimates and grew by about 14% over its Q313 revenue (QoQ growth) and about 47% over that of Q4 a year ago (YoY growth) to $447 million, registering its slowest ever YoY revenue growth rate. But, the company also posted its largest incremental quarterly revenue, adding $54 million to last quarter’s revenue of $393 million; and what appeared to be its slowest growth is actually a consequence of its higher revenue base or, the base effect as it is referred to. Its FY 2013 revenue closed at $1.53 billion clocking a 57% YoY growth.
While operating and net margins improved marginally on a QoQ basis, they were much lower YoY. From the company’s earnings release, it doesn't look like this trend will reverse in a hurry as LinkedIn is likely to continue investing heavily in R&D, product development and sales & marketing. Equity dilution came in at about 5% which is not alarming.
|In millions of $||Q4 2012||Q3 2013||Q4 2013||% QoQ||% YoY||FY 2012||FY 2013||% YoY|
|Operating Margin %||8.8%||1.2%||2.6%||5.8%||3.1%|
|Net Margin %||3.8%||-0.9%||0.9%||2.2%||1.7%|
The company added 18 million users at a YoY growth of 37% and QoQ growth of 7% and ended the quarter with 277 million users and 187 million unique visitors with 66% of the users located outside the U.S. The user base grew by 75 million users for FY 2013 as a whole, with over 70% of its new users coming from outside the U.S.A. All in all, it was a good performance to close FY 2013 with a few positives if at all, but hardly any negatives.
Investors unhappy with LinkedIn FY 2014 guidance
A large part of the panic came from the company’s Q1 2014 and FY 2014 guidance. The company provided a Q1 2014 revenue guidance of $455 - $460 million vs consensus estimates of $470 million and an FY 2014 revenue guidance of $2020 - $2050 pegging estimated YoY growth at between 32% and 34%, its slowest growth so far. However, LinkedIn’s guidance has traditionally always been lower than consensus estimates, which it has always managed to beat. What makes it different this time around is that its FY 2014 guidance projects absolute revenue growth at $491-$521 vs FY 2013 absolute revenue growth of $556 million.
For a while now, investors have been betting wholly and solely on LinkedIn’s growth engine to keep on belting out its stellar performances, pushing its stock price way beyond reasonable valuations. At these levels, pretty much any excuse is good enough to trigger a chunky correction like we've seen in the case of Twitter.
LinkedIn is slightly cheaper than Facebook (FB) in Price to Sales ratio (P/S) terms. However, FB still has a far bigger user base accompanied by larger revenues, operating margins and net margins. We’ve always found Facebook itself to be overpriced, but for want of a better option, we can use it to make a comparison.
|Twitter Q4 2013||Facebook Q4 2013||LinkedIn Q4 2013|
|Market Cap on Feb 06, 2014 (in billions USD)||27.25||158.32||26.68|
|TTM Revenue (in billions USD)||0.66||7.87||1.53|
|Price/Sales ratio (per share)||41.04||20.11||17.44|
|Stock price ($)||50.03||62.16||223.45|
|Adjusted EPS ($)||NA||0.87||1.61|
|TTM P/E ratio||NA||71.45||138.79|
Considering that both, Facebook’s and LinkedIn’s FY 2013 revenues have grown at about the same rate YoY, using Facebook’s Price to Earnings (P/E) ratio to value LinkedIn provides us with a price of $115 per share, which implies a 50% correction in the stock price at the very least. This calculation does not even factor in the not so optimistic revenue guidance that LinkedIn has provided.
LinkedIn: A company with potential
For starters, LinkedIn’s actual revenue for FY 2013 ended up about $118 million, or 8% higher than the lower end of the FY 2013 guidance it had provided at the end of FY 2012. That however, is no excuse to jump the gun and assume anything, lest we find ourselves in a Wolf ! Wolf ! situation where this time, the guidance might actually turn out be right.
Leaving the guidance aside, LinkedIn is a company with potential. Starting with the nature of its users that goes beyond teenagers with lots of free time and not as much money, it has a few things going for it. LinkedIn’s acquisition of Pulse, and the introduction of rich media in May 2013 have helped it transform into more of a media company than it was. Also, interesting features like ‘Endorsements’ and ‘Who’s viewed my profile?’ have made the whole experience interesting and very different from the passive resume database that it used to be a long time ago.
On the business front, its premium subscription retention rates have improved and its corporate customer base has grown by 49% to 24,500 with higher returning business. Further, its acquisition of Bright.com, a data analytics company is expected to boost its ability to match job seekers and employers, thereby aiding its revenue segments Talent Solutions and Premium Subscriptions, and thereby also Marketing Solutions.
A clear mention about strategic intent to target expansion in China where they currently have just 4 million users should also be an undoubted plus given that LinkedIn is not banned in China like Twitter and Facebook, giving it additional access to a large potential user base. However, as we’ve said time and again, at the current price, LinkedIn stock is overvalued. For LinkedIn to be considered an attractive investment, it will need a solid price correction and healthier profit margins.
To see LinkedIn’s latest stock price movement, click here (NYSE:LNKD)