- LinkedIn could beat expectations when it reports earnings on 28 April.
- Active users, revenue and operating expenses will be the numbers to watch.
- Investors would do well to wait for meaningful improvements in these numbers before investing.
LinkedIn (NYSE:LNKD) is expected to report its earnings for Q1 2016 on 28 April after markets close. For long term investors, the 3 key numbers to watch will be unique visiting members, revenue and operating expenses. LinkedIn's commentary on the Q4 earnings call did suggest that engagement levels are improving on the platform. However, the professional networking site saw its shares tank by a brutal 40% after issuing soft guidance for the upcoming earnings. With LinkedIn shares still down by about 47% for the year so far, any positive triggers could lift the stock post the earnings release. However, without a material improvement in any of the 3 metrics, a post earnings rally might be hard to sustain.
Analysts are expecting LinkedIn to deliver a revenue of $829.5 million, about $10 million above the company's guidance of $820 million. That translates to a growth of 30% Year-on-Year (YoY). As for Non-GAAP Earnings Per Share (EPS), analysts are expecting the company to bring in $0.60 per share, 3 cents higher than the year-ago quarter.
LinkedIn has either met or beaten estimates for each quarter in the last two years, and a beat again won't be surprising. 39 Analysts still have an average target price of $164.9 for the stock. That represents a solid 37% upside potential from its current price of $120. However, changes in ratings by analysts reflect a shift in sentiment from a strongly positive one 3 months ago, to a relatively milder positive stance at present. Analysts with a 'strong buy' rating have reduced to 9 from 12 and 'buy' ratings dropped to 15 from 25, while hold ratings have gone from 6 to 18.
We feel that LinkedIn could be a risky bet going into earnings unless the company manages to report meaningful improvements in the 3 metrics we discussed at the beginning of the post. Here's why.
Like in the case of micro blogging site Twitter, active user growth has been a challenge for LinkedIn as well. While the company's member base has expanded consistently every quarter, the number of active users or 'unique visiting members' as LinkedIn calls them, has plateaued at around the 100 million mark for the whole of last year. With no meaningful uptick in member page views either, the unique visiting members metric becomes even more important in the context of long-term growth.
LinkedIn's growth has slowed significantly over the last few years. Sales grew by 34% in 2015, down from 57% in 2013, and 45% in 2014. LinkedIn has projected a revenue of $3.65 billion for the full year, implying a 22% YoY growth. While the company could very well beat its own guidance like it has in the past, it's very likely growth will slow further by the end of the year.
To make things worse, the company's operating expenses have grown at a much faster pace than the top line, resulting in operating losses of $151 million in 2015, compared to an operating profit of $36 million in 2014. Further, net losses for the year swelled to $165 million, up more than 10X from $15 million.
One way to quickly help the situation is for LinkedIn to cut stock-based compensation expenses, which rose to $510 million in 2015, up from $319 million in the preceding year. This one line item could potentially have saved the company from reporting the heavy losses it has. However, companies like Twitter, LinkedIn and Facebook have all spent generously on stock-based compensation in 2015, and that trend is unlikely to change in a hurry.
Summing It Up
LinkedIn could very well come out beating estimates when it reports earnings on 28 April. Given the thrashing the stock has received in the year to date, the slightest positive could trigger a rally. However, in the absence of meaningful improvements in the company's active user base, top line growth and operating losses, the rally might be short lived. Long-term investors would do well to wait out the earnings release. You can also watch a quick roundup of key financials in this LinkedIn stock analysis video.