LinkedIn’s Stock Tumbles On Weak Future Outlook

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LNKD: LinkedIn logo
LNKD
LinkedIn

Although LinkedIn (NASDAQ:LNKD) posted 35% revenue growth in Q1, its share price tumbled by around 20% post the earnings release, as the investors were disappointed with the future guidance. Specifically, the revenue forecast for Q2 2015 and the profitability outlook for the full year came in below market expectations. This was caused by factors such as currency headwinds, weak demand from Europe, and the acquisition of Lynda. Additionally, the re-alignment of sales workforce also caused some revenue headwind.

Notwithstanding the updated outlook, we think the recent investor reaction also stems from unrealistic expectations which had raised the market valuation to very high levels. LinkedIn’s long-term growth potential remains strong, in our view. The company’s growth strategies are driving healthy growth in user base and engagement metrics on the platform.  These include  redesigning member profiles, growing the mobile ecosystem and publisher network, strengthening jobs listings, and expanding into newer geographies.  This will likely continue to push up demand for recruiting, marketing, and selling services on its platform. While the transition of sales workforce created short-term headwinds, it should help to  propel revenue growth in 2016 and beyond. Additionally, the acquisition of Lynda throws open large opportunities in the multi-billion dollar online learning market. We believe online learning will add significantly to LinkedIn’s overall revenue stream in the coming years.

See our complete analysis for LinkedIn

Weak Guidance Caused The Share Price To Tumble

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LinkedIn’s stock reacted negatively post the earnings release mainly on account of weak guidance. For Q2 2015, LinkedIn’s management forecast revenue and adjusted EBITDA at $672.5 million (at the mid-point) and $120 million, respectively, which came in far below market expectations. Additionally, the company also lowered its outlook for the full year:  The guidance for adjusted EBITDA and non-GAAP EPS , earlier forecast at $785 million and $2.95, respectively, have now been changed significantly to $630 million and $1.90 respectively.

The key factors that drove these reduced forecasts included currency headwinds, reduced demand for display advertising in Europe, and the re-alignment of sales workforce, which caused some customer churn. Moreover, the acquisition of Lynda.com will further add pressure on margins in the short-term. This is because the revenue contribution from this business will be impacted due to accounting reasons (fair value adjustment for deferred revenue) and the scheduled timing for the close of the transaction, which is expected in late Q2.

First Quarter Revenue Growth Was Broad-Based Across Business Segments

LinkedIn posted revenue of $638 million in Q1 2015, which was driven by strong growth across business segments. Revenue in the Talent Solutions segment rose by 36%, to comprise  62% of the overall revenue. This was driven by both an increase in the customer base as well as additional business from existing customers. However, the re-segmentation of sales workforce caused a degree of customer loss in this segment, and this will likely weigh on future revenue growth.

Revenue from Marketing Solutions products grew by 56% annually, fueled by growing traction across Sponsored Updates and the Lead Accelerator product. However, the traditional display advertising business suffered from low demand mainly in Europe; additionally, the transition of sales workforce to prepare them for newer products also caused some revenue pressure. These headwinds are expected to persist in the short-term. Premium Subscriptions revenue increased by 28% in Q1.  We expect growth rates to accelerate in this segment in the coming quarters propelled by rapidly rising demand for LinkedIn’s sales solutions.

Progress Seen Against Growth Strategies

LinkedIn reported healthy growth across user base and engagement metrics during the first quarter as its growth strategies continued to gain traction. Its cumulative members rose by 23% to 364 million. Additionally, the 31% growth in member page views far outpaced the 18% rise in unique visiting members, indicating higher engagement levels on the platform.

The company’s efforts to drastically raise the number of job listings continued to gain ground as the company added over 500,000 job postings during the quarter. The number of job postings have now crossed 3.5 million on the platform. Additionally, the publishing platform gained higher popularity as the number of weekly long-form posts recently surpassed 100,000 as compared to 50,000 at the end of the last quarter. International expansion represents another key growth strategy and the company recently launched its website in Arabic language. Additionally, the company is now prioritizing on mobile platform to gain a larger foothold in the Chinese market. We believe these efforts will continue drive increased traffic levels on the platform in the coming quarters.

We are in the process of revising our $186 price estimate for LinkedIn’s stock.

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