LinkedIn Stock Analysis Post The Recent Rally

  • LinkedIn has delivered revenue growth and monetization.
  • Recent data shows lackluster user growth and engagement.
  • LinkedIn is a risky bet at current valuations.
LinkedIn Stock Analysis Post The Recent Rally

LinkedIn (NYSE:LNKD) stock has had a great run in the past few months, rising by over 50% since its 52 week low in May 2014. LinkedIn's Q2 2014 earnings release saw the the company deliver strong revenue growth and raise its full year revenue guidance. User Monetization has been one of LinkedIn’s strength. However, in spite of the optimism that LinkedIn has generated, the company’s user growth and engagement levels aren’t as encouraging as the rest of its metrics. We look at LinkedIn’s stock valuations in addition to the positives and negatives that one should consider before investing in LinkedIn.

LinkedIn Revenue Growth

LinkedIn’s YoY revenue growth has declined compared to earlier levels as the revenue base has continued to expand. However, growth remained strong at about 47% YoY in the latest quarter. The company’s revised full year revenue guidance pegs growth at about 40% over FY 2013 revenue, which is a little lower than its current level of growth. That said, in the past, LinkedIn has typically gone past its own guidance as well as analyst estimates. Going by its track record, revenue growth could end up closer to its current levels. Revenue growth is definitely one of the positives for the stock.

LinkedIn Revenue Growth

LinkedIn Profit Margins

LinkedIn’s operating profit margin of 2.6% has improved marginally over the LTM (last twelve months) average. On an average, over the last 8 quarters, the company’s profit margins have remained in the low positive single digit to negative range. With LinkedIn’s expansion into China, there’s not much reason to suggest that profit margins will improve anytime soon.

LinkedIn User Monetization

LinkedIn’s user monetization rates have been improving consistently. In fact its monetization rates are higher than those of its peers Twitter and Facebook. The fact that LinkedIn’s user base consists mostly of working professionals adds value for marketers. Given that this strength is inherent to LinkedIn’s business, monetization rates could continue to improve in the coming quarters.

LinkedIn User Monetization Rates

LinkedIn Member Growth

LinkedIn added about 17 million members in Q2 2014, taking its tally of registered members to 313.4 million. For the quarter, the platform registered an impressive YoY growth of 32% in its member base. However, a closer look at the company’s ‘monthly unique visiting members’ metric shows that growth isn’t all that great.

LinkedIn Member Growth

Growth in the number of unique visiting members (monthly) has been declining at a rapid pace over the last year. At a time when LinkedIn has added a little over 75 million users, the absolute increase in active members has been lower than 10 million.

Perhaps the biggest positive pertaining to users/members is the growing proportion of mobile unique visiting members to total active members. Linkedin has seen a sustained improvement in this metric quarter after quarter with close to 45% of its total active members visiting the platform from mobile devices in Q2 2014.

LinkedIn's strategy to un-bundle its services into multiple apps should enhance the user experience and improve user engagement for this growing base of mobile users.

LinkedIn User Engagement

Even LinkedIn's user engagement metrics reflect a rather negative trend. While YoY growth rates have been declining on a consistent basis, the absolute increase in page views has been quite erratic, entering the negative territory for the first time in Q2 2014.

LinkedIn User Engagement

Long form publishing, which is getting rolled out to members in phases, is one among the many measures LinkedIn is taking to boost user engagement on the platform. The impact of these measures should be visible in the coming quarters.

LinkedIn Valuation

LinkedIn's Price to Sales ratio of 15 translates to steep valuations. LinkedIn's revenue growth and user monetization are big positives. While user monetization is important, user growth and engagement influence long term revenue growth potential. The company's poor profitability, lackluster user growth and user engagement make it a risky bet at its current valuations. Our LinkedIn stock analysis highlights some other facts and figures you should look at while evaluating LinkedIn as an investment opportunity.

LinkedIn's foray into China gives the company access to a potentially large user base. However, given the challenges in China for LinkedIn, one would not want to take any of that growth for granted.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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