LinkedIn’s Earnings Will Reflect Continued Growth But Risings Costs Are A Concern

LinkedIn (NYSE:LNKD) will report its Q2 2012 earnings on August 2. It had a great year in 2011 with 60% growth in subscriber numbers and 139% growth in corporate clients, and the company followed it up with better growth in the first quarter of 2012.

We expect the growth to continue, going forward, albeit at a slower rate as it strengthens its position in social media where it is up against Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG) as well as in the job search space where it competes with Monster (NYSE:MWW). Going forward, we expect to see steady growth in its user numbers, corporate clients as well as subscription, advertising and services revenues.

See our complete analysis for LinkedIn

International expansion and mobile to drive growth

We expect to see LinkedIn’s user numbers to continue to increase in the coming years. Since all of LinkedIn’s businesses are linked to its user base in one way or another, any increase in its user base will drive page views, higher subscription revenue and also attract more corporate customers wanting to access the growing user base.

LinkedIn saw its registered user base expand to 160 million by the end of Q1. We expect it to increase to around 500 million by the end of the forecast period driven by LinkedIn’s focus on users in international markets and increasing smartphone penetration to drive user growth as well as engagement on its platform. Mobile advertising will account for a much greater portion of its overall ads and marketing revenue, going forward. It saw the number of unique mobile visitors grow nearly 275% last quarter. Mobile visitors now account for nearly 22% of its total unique visitor member base.

LinkedIn recently launched an iPad app and Windows Phone app and is present on all the major smartphone platforms. It also unveiled a redesign to boost platform engagement and may also benefit from direct integration into the next version of Office which will be launched in 2013.

Operating expenses need to be tempered down

LinkedIn saw its operating expenses nearly double in the last quarter primarily due to aggressive business development and expansion plans. The marketing expenses grew 125% and may be a significant drag on the earnings, going forward, if LinkedIn fails to rein them in. We expect LinkedIn to bring down these costs (as a percentage of gross profits) as its revenues increase faster than expenses. However, if it’s unable to do so, there could be a significant downside to its value. We will keep an eye on these numbers during the earnings call.

We currently have a $44 Trefis price estimate for LinkedIn, which stands nearly 60% below its market price. Here’s why we think LinkedIn is highly overvalued.