- LinkedIn beat revenue and EPS estimates; clocked improvements on all metrics.
- Future guidance indicates a slowdown in revenue growth even in absolute terms.
- With slowing growth and no net profits expected in 2014, this stock is overpriced.
LinkedIn (NYSE:LNKD) announced its Q1 2014 results on 1 May. The professional networking site delivered a good quarter, beating estimates in terms of revenue and non GAAP EPS. LinkedIn showed improvements across the board with better monetization, user growth and user engagement. However, there wasn’t much to be very excited about, which is something a company can’t afford when its stock is priced at LinkedIn’s current valuations.
Q1 marked a Y/Y improvement in terms of absolute revenue added. However, LinkedIn’s Q2 and FY 2014 guidance indicate a marked slowdown in growth rates and absolute revenue addition, and that’s possibly what has disappointed investors. The stock is trading down about 2% pre-market on 2nd May, post the results.
LinkedIn Q1 2014: Key Highlights
- Revenue: $473.2 million vs $467 million (average estimate)
- Non GAAP EPS: $0.38 vs $0.34 (average estimate)
- Member Base: 296.5 million
LinkedIn Q1 2014: Key Financials
LinkedIn beat revenue estimates for the 9th time on the trot by registering a revenue growth of 45.7% Y/Y (over Q1 2013). Compared to Q4’s Y/Y growth of 47.3%, there wasn’t much of a slowdown. In absolute terms the company increased its revenue by $26 million vs $20 million increase seen in q1 2013.
Profitability was down both sequentially and Y/Y as LinkedIn recorded operating and net profit margins of -0.2% and -2.8%. Operating and net losses came in at ($0.8) million and (13.4) million.
Excluding amortization of intangibles, stock based compensation and its tax impact, the company reports ‘non GAAP net income’, which stood at $47.3 million. Net income was dragged into the red largely by stock based compensation expenses.
LinkedIn generated $128.8 million of cash from operations to end the quarter with cash and cash equivalents of $508 million, down from $803 million last quarter.
LinkedIn saw growth across segments with Talent Solutions growing at the fastest pace. This is a positive given that the segment is essentially its core business.
- Talent Solutions – grew 50% Y/Y to contribute 58% of revenue
- Marketing Solutions – grew 36% Y/Y to contribute 22% of revenue
- Premium Subscriptions – grew 46% Y/Y to contribute 20% of revenue
At large, LinkedIn beat revenue and EPS estimates to close a good quarter in financial terms.
LinkedIn Q1 2014: Key Metrics
LinkedIn showed an improvement in user related metrics with better user growth, engagement and monetization.
LinkedIn’s member base grew at 36% Y/Y to 296.5 million. The quarter was one of its best in terms of member addition, adding 19.5 million members in the quarter. QuantCast data shows an uptick in active monthly members at 147 million (average for the quarter) after two consecutive quarters of decline.
At $3.2, LinkedIn’s quarterly revenue per monthly active user grew at 61% Y/Y and 1% sequentially to clock its best Y/Y growth. The company also registered a rebound in page views (in billions) after slowing for 2 quarters.
LinkedIn Q2 and FY 2014 Guidance & Outlook
LinkedIn issued a Q2 guidance of $500 – 505 million in revenue.
The guidance implies a Y/Y growth of 37% to 39%, down from nearly 46% this quarter. However, one might not want to read too much into that, given that LinkedIn is quite conservative in its guidance, consistently pegging it below analyst estimates and then beating them every quarter.
Adjusted EBITDA is projected at $118 - $120 million. The guidance also projects amortization of $53 million and stock based compensation of $75 million. Put together these expenses are greater than the adjusted EBITDA, which means, no GAAP net income this coming quarter either.
LinkedIn revised its FY 2014 guidance upwards to $2.06 – 2.08 billion up from $2.02 – 2.05 billion.
Here again, the guidance implies that no net profits will be made for the year as a whole. What’s worse is that the full year guidance implies a slowdown in revenue addition at $532 million expected to be added in 2014 vs $556 million added in FY 2013.
LinkedIn Company Valuation
As we had predicted in our earnings preview, LinkedIn has come out with revenue numbers that surpassed expectations. Further, with its ongoing investments in China, LinkedIn’s ever so thin profit margins were expected to evaporate, and they have.
Largely, growth remains healthy at 46%, but it is slowing down; not only in percentage terms, but also in absolute terms. That’s something that’s not acceptable for such highly valued businesses, since low or no profits imply that they are valued for their growth.
We think LinkedIn is a great business, but LNKD stock is overpriced at $161 a share with a Price/Sales multiple of 11.6 making it a risky bet.
Also read: LinkedIn’s prospects in China
To see LinkedIn’s latest stock price movement, click here (NYSE:LNKD)