LinkedIn‘s (NASDAQ:LNKD) stock has retreated roughly 20% since mid-September, with some of the decline coming post Q4 2013 earnings announcement when the company missed consensus estimates. We have stated on many occasions that even though LinkedIn has a good business model and there is strong potential to expand, the market is valuing the stock very steeply. The fourth quarter results reinforced this belief to some extent as there were signs of slowing growth. The outlook for 2014 didn’t impress the market either and shares tanked by more than 6%. The company plans to make some strategic investments to fuel growth, including: 1) expanding in China; 2) creating world economic graph to map 3 billion workers; and, 3) making efforts to increase user engagement on mobile devices. However, these initiatives could lead to short-term cost pressure, in our view.
We are currently reviewing our price estimate for LinkedIn in the light of recent earnings, and will have an update ready soon. Our current price estimate for the company stands at $154, implying a discount of about 25% to the market price.
Slowing Growth Puts Market Valuation Under Doubt
LinkedIn’s revenues for the full year 2013 stood at $1.53 billion, which was slightly below our earlier expectation of $1.54 billion. We have been cautious about our forecast for the company, given the high growth that it has witnessed in recent quarters and the market’s exuberance regarding the same. While LinkedIn more or less maintained its membership growth in Q4 2013, the increase in the number of unique visitors declined substantially. Compared to year-over-year growth of 34% and 30% observed in LinkedIn’s unique visitors in Q2 and Q3 2013, respectively, the figure for the fourth quarter stood at 20%.  Sequentially, in fact, there was a small decline of 2% which puts LinkedIn’s ability to justify its market valuation under doubt.
A prominent bank and broker shares this view. Bank of America-Merill Lynch downgraded LinkedIn’s stock last month from buy to neutral stating that the growth in 2014 and 2015 is likely to be on the conservative side.  The company’s analysts believe that the job postings and site usage slowed down in Q4 2013 and that the effect is likely to persist for the next couple of quarters.
In 2014, LinkedIn expects to earn revenues in the range of $2.02 billion to $2.05 billion.  The mid point of this guidance implies a growth of 33%, which is significantly below 57% observed in 2013. Moreover, the high end of the range is just below the consensus estimate, which will likely be coming down a bit. Clearly, the business is slowing down and emerging markets still aren’t offering the same revenue opportunities that the company enjoys in developed markets of Europe and the U.S.Notes:
- LinkedIn’s SEC Filings [↩]
- UPDATE: BofA/Merrill Lynch Downgrades LinkedIn (LNKD) to Neutral, Street Insider, January 7 2014 [↩]
- LinkedIn’s Press Release [↩]