LinkedIn (NYSE:LNKD) has entered a very exciting phase with its entry into China via a local language site, a move that will give it access to a huge opportunity. However, even after factoring in the best outcome from China, we still think that the LinkedIn stock is overpriced (see our Linkedin stock analysis). We look at the company’s growth, profitability and current valuations.
LinkedIn Revenue Growth
LinkedIn’s annual revenue growth rate has slowed significantly over the last 3 years to reach 56% in FY 2013 from over 100% in FY 2011. That said, 56% is still a very healthy growth rate to have; however, the company’s future guidance which is lower than analysts’ expectations, pegs growth at 32% - 34% in FY 2014. While a slowdown in the growth rate is expected at these levels, the guidance implies a slight decrease in the absolute revenue growth in the current fiscal compared to last year.
Typically LinkedIn’s guidance has always been lower than analysts’ expectations, but it has consistently beaten their estimates. It would not be prudent to proceed with the assumption that the same would always be repeated. Further, it is important to note that LinkedIn is not expecting any material contribution from its newly set up operations in China in FY 2014.
|Revenue (in millions USD)||522.1||972.3||1,519.3||2,020 - 2,050|
|YoY Growth (in %)||115||86||56||32 - 34|
|Operating Margins (in %)||5||6||3|
* LinkedIn FY 2014 guidance
With LinkedIn’s operating and net profit margins languishing in the lower single digits, it’s not one of its strengths. With its big plans for China, it is very likely that heavy spends in the region will further squeeze profit margins.
LinkedIn’s member base has been growing, but this number is prone to overstatement since not all of them would be active. Data from QuantCast suggests that active users as a percentage of total members has been falling from as high as 80% in the past to about 50% in Q4 2013. This is not alarming since it is bound to happen as the member base expands. That said, it is important to note the same as an investor.
If LinkedIn’s plans in China play out, the country could add a huge number of users to LinkedIn’s member base and eventually account for 25% of its members by 2017. However, monetization rates for LinkedIn in the Asia Pacific (APAC) region are about half of the global average.
According to our estimates, by 2017, Linkedin China could account for about 3% of the company's overall revenue. And so, China’s member base making a significant contribution to the overall revenue is something that might happen eventually once the market matures and starts to see higher monetization rates. But it might not have a significant impact on revenues in the next couple of years. Further, given the track record that LinkedIn’s peers have had in China, one would do well not to take aspirations for granted.
Facebook is growing at a faster rate than LinkedIn and the company also has higher profit margins. In our view, even Facebook is overvalued. However, if one were to value LinkedIn by using Facebook’s adjusted Price Earnings ratio (or PE ratio), LinkedIn should be priced at $127 a share.
|Adjusted LTM PE ratio||119.1||NA||79.0|
|LTM price to sales ratio||15.1||46.1||22.2|
Even using Faceboook’s Enterprise Value/Earnings before Interest, Tax, Depreciation and Amortization (EV/EBITDA), one would arrive at a price of $113/share.
LinkedIn’s stock price has fallen by close to 11% since the beginning of 2014, but we think that it might have a long way to go before it becomes attractive.
To see LinkedIn’s latest stock price movement, click here (NYSE:LNKD)