- LinkedIn’s stock price has corrected heavily in 2014.
- User Monetization is impressive, but engagement needs improvement.
- LinkedIn is a good company but is overvalued and risky at $155 a share.
LinkedIn’s (NYSE:LNKD) stock has fallen by more than 27% since the beginning of 2014, and yet, we feel that it’s still far from being called attractively priced. As discussed in our review of LinkedIn earnings - Q1 2014, the company delivered a solid quarter, but disappointed investors with its future guidance. There are a few concerns around LinkedIn’s growth projections. That apart, we think LinkedIn’s is a good business, and a pricey stock.
LinkedIn Member Growth
LinkedIn’s member base metric actually records the total members as opposed to the active members, thus overstating the user base. What one should keep an eye on, is the active member base, because it is this number that generates revenue for LinkedIn.
As is evident from the graph above, the active member base is far lower than the total number base, and the two lines could continue to diverge as the total number of members increases. The challenge for LinkedIn will be to engage registered users and convert them to active users. What’s a tad worrying is that LinkedIn did have a shaky couple of quarters to end FY 2013, as the platform recorded a decline in active members for the first time. What’s more, the decline continued for two quarters on the trot.
The rebound in member addition in Q1 is a yearly trend and should not be read into too much. However, if LinkedIn manages to clock a decent user addition in the quarters to come, these fears should be allayed. After all, LinkedIn’s problem is not nearly as severe as that of Twitter’s, which has seen a decline in absolute user addition throughout FY 2013. LinkedIn’s Chinese foray with tie ups like the one with Tencent’s fast growing WeChat, should also aid it in pursuit of user growth.
Further, LinkedIn’s users inherently are of greater value to advertisers, consisting largely of working professionals. So, user growth is not an issue as things stand, unless those numbers keep on dwindling. By its own admission, LinkedIn has been working on improving user engagement, an area in which they clearly lag behind peers like Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR).
LinkedIn User Engagement and Monetization
LinkedIn’s strength is in its user quality and the ability to monetize those users. As is evident from the graph, at a revenue/active user of $10 in FY 2013, LinkedIn does much better than Facebook, at about $6.5 and Twitter, at $2.9 a user.
Another one of LinkedIn’s new features ranks user profiles among their connections, playing on the competitive spirit of users. The feature also offers suggestions that help users improve their rankings, incentivising the user to be more active and keep their profiles updated.
One basic feature that we think LinkedIn has missed out on is to allow users to view their own timelines, which contain the content they've shared. This is available on Facebook as well as Twitter. To sum up, LinkedIn’s user monetization is impressive, and improved user engagement can really propel user and revenue growth.
LinkedIn Future Outlook and Valuation
LinkedIn’s Q2 2014 guidance pegs revenue at $500-550 million, which implies a slowdown in absolute revenue growth. Further, it indicates that no net profits can be expected for FY 2014.
However, LinkedIn has beaten estimates for 9 quarters on the trot, implying that one must expect a conservative guidance. LinkedIn’s China expansion is not expected to contribute materially in the first half of the year, and so, any additions on that front will be a bonus.
After the loss in Q1 2014, the Price/Earnings multiple goes out of the equation. At $155 a share, LinkedIn currently trades at a Price/Sales multiple of 11.5, which makes it expansive and risky, given that some variables like user growth and engagement are still a work in progress, so to say.
Our analysis of the Linkedin stock assigns it a hold rating. View our Linkedin stock analysis here.
To see LinkedIn’s latest stock price movement, click here (NYSE:LNKD)