- A 5-7% revenue miss doesn't typically quantify a 40% fall in stock price.
- LinkedIn's macro pressures are shared by the entire market.
- With a $150 price target, LinkedIn stock is undervalued by 35%.
The selloff in LinkedIn (NYSE:LNKD) stock has caused this stock to lose its momentum, down 46% to its 2012 levels. LinkedIn stock is greatly oversold as a 40% downfall came the day after delivering a weak revenue outlook for Q1 and Full year 2016 in their recent Q4 2015 earnings report.
LinkedIn's guidance of 55 cents per share on $820 million revenue was significantly short of expectations for 74 cents EPS and $866 million revenue. Investors are skeptical about LinkedIn's full-year performance and macro issues from this weak management guidance. LinkedIn's focus on continued investment in high-value products and services will continue to put pressure on profitability.
In spite of this and the weak earnings report, CFO Steve Sordello was surprised by the level of negative reaction: "We really haven't seen anything fundamentally change in the business." LinkedIn is a stock that commonly fluctuates 10% up or down following earnings reports, but there is little argument for a 40% selloff, which is unwarranted and due to sell-happy investors ready to jump ship for any given reason. A 5-7% revenue miss doesn't typically justify a 40% fall in stock price.
LinkedIn stock has a history of trading at high multiples. Trading at 24 times future earnings is 50% of the typical shareholder's expectations. LinkedIn's Q4 performance exceeded guidance for earnings as well as revenue.
Still, many positives for shareholders should have come from LinkedIn's guidance report, considering the macro uncertainties LinkedIn is facing are problems shared by every company in their sector and across the market worldwide. LinkedIn CEO Jeff Weiner said: 'Q4 was a strong quarter for LinkedIn bringing to a close a successful year of growth and innovation against our long-term roadmap. We enter 2016 with increased focus on core initiatives that will help drive growth and scale across our portfolio.'
There are definitive troubles in LinkedIn's global business. There is a user growth slowdown in South Africa and the Middle East, which contribute 24% of LinkedIn revenue, and in Asia Pacific, which makes up 8% of revenue. These issues will need to be resolved or remedied, but are clearly tied to the pressures of the global market, which should worry long-term shareholders. LinkedIn will maintain its perception of higher risk in 2016, barring multiple quarters of positive earnings to regain its momentum.
LinkedIn is a solid business and will continue to grow its hiring and training products, and take advantage of growth in global sales opportunities. The macro uncertainties and global user growth issues are problems shared by the entire market. Expectations have been re-evaluated following the weak earnings calls. A $150 price target is an appropriate expectation, which makes LinkedIn stock currently undervalued by nearly 35%.
Keys To LinkedIn Long-Term Growth
-The development of Lynda.com's enterprise solutions. This expansion will address skill development for employers and HR professionals. This completely integrates Lynda.com to LinkedIn's Talent Solutions marketplace.
-Talent Solutions revenue grew 45% to $535 million. Lynda.com's contribution was $49 million, and Lynda.com's 2016 expansion will provide an incredibly positive revenue boost.
-LinkedIn's Lead Accelerator is scaling quickly less than a year after launch, which has concerned shareholders because of resources necessary to scale this product, but management's conservative guidance reproaches such concerns.
-Facebook has shown little to no desire to compete against LinkedIn, which I find appropriate, considering most people would rather keep their Facebook profile separate from their professional resumé and work life. LinkedIn's lack of competition allows for shareholder confidence in its long-term growth.