LinkedIn Earnings Preview: Revenue Growth May Continue To Slow

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LinkedIn

LinkedIn (NASDAQ:LNKD) will release its Q2 2014 earnings on July 31st. The strong optimism surrounding the company’s stock has faded in recent quarters, pushing the price down from its all time high of $257 to where it is currently today ($184 per share). LinkedIn is primarily a growth stock and the slowdown in its revenues growth has hurt its market valuation. We expect LinkedIn’s revenue growth to decline in Q2 2014 compared to the same quarter a year ago as the company has already expanded in relatively easier markets. The next phase of growth is going to be more challenging. The company has been working on increasing user engagement on mobile devices and improving its targeting ability to drive growth in its business. This can help it command higher pricing on its recruitment solutions service. Overall, we believe that LinkedIn will need to come up with some innovative products for the stock see a significant gain.

Our price estimate for LinkedIn stands at $134, implying a discount of around 25% to the market price.

See our complete analysis for LinkedIn

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Revenue Growth May Decline

We expect the revenue growth to come down in Q2 2014 compared to what it was last year. Although LinkedIn’s monetization is improving, its user base growth has slowed down in recent quarters. This doesn’t mean there is a problem with the company’s business model or a significant competitive threat. It just means that LinkedIn has penetrated early adopters and the next phase of growth is going to be more challenging, as is the case with any business. This was visible in its first quarter results. Compared to more than 72% revenue growth observed in Q1 2013, the figure for the first quarter of 2014 dropped to 46%. [1] This tends to happen as the business matures. The rate at which LinkedIn was adding subscribers has come down, and key metrics such as revenue per customer and revenue per page view are facing tougher comparisons. What LinkedIn needs to do is continue to show some meaningful growth, stay defiant against new entrants and ward off the competitive threat from existing players such as Monster. The market valuation has undergone a significant correction in recent months but there is still some more room for it, in our opinion.

LinkedIn is focusing on improving user engagement, and has increased the engagement per visiting member by more than 40% on the back of new features and technical enhancements. ((LinkedIn’s Q1 2014 Earnings Transcript)) This has helped the company in creating a bigger data repository which it can leverage to connect candidates and recruiters with greater accuracy. This will continue to drive growth in LinkedIn’s ad monetization, revenue per corporate customer and the total number of corporate customers. We expect these business drivers to grow by 15%, 30% and 7% respectively this year which will help the company combat its increasing R&D (research and development) and SG&A (selling, general and administrative) costs.

Expect Continued Growth In Job Listings

In early June, LinkedIn also announced its decision to aggregate job listings from other sites, thus creating a new feature called Limited Listings. This feature will be different from LinkedIn Jobs because the new aggregated jobs will be visible only to those candidates who search for them, thus specifically targeting active candidates. While the company may not earn additional revenue from Limited Listings, the move will definitely improve its value proposition and attract more users. This marks LinkedIn’s foray in job aggregator market where Indeed and Simply Hired are big players. The company ultimately wants to become the preferred platform for job seekers, and seems to be progressing well. LinkedIn will double its total job listings to about 700,000 with this new feature.

Linked has also launched a standalone job search mobile app. While the impact of this move will not be visible in the second quarter, it is an acknowledgement of the fact that while the company has disrupted the traditional hiring business, job listings are not going away. It is prudent of LinkedIn to make efforts to consolidate its position in this market. We estimate that recruitment services and job listings business constitutes roughly 50% of LinkedIn’s value, of which one third comes from job listings alone.

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Notes:
  1. LinkedIn’s SEC Filings []