LinkedIn’s (NYSE:LNKD) stock is taking a hit this week as the company is moving forward with plans for a secondary offering in excess of $700 million. [1] Many of its early venture capital investors are among the existing shareholders selling their stakes while $90-$100 million worth of new shares could signal that the company wants additional cash to cover its rising expenditures. LinkedIn competes in the online recruitment space with companies such as Monster (NYSE:MWW) and Craigslist as well as the social networking space with Google (NASDAQ:GOOG) and Facebook.
See our complete stock analysis for LinkedIn’s stock here
Q3 Results Were A Signal That Expenditures Are Rising
Since it went public, LinkedIn has incurred significant marketing and promotion related expenses, which have contributed a big role in the steep expansion in its subscriber base. For the first 9 months of 2010 and 2011, marketing expenses grew from 24% to around 32% as a percentage of revenue. [2]
The secondary offering of around 1.3 million new shares can send out a signal that LinkedIn intends to pursue heavy marketing investments in the near future as well, requiring additional cash sources for the same.In addition to its growth outlook, the public float will essentially double with this secondary offering, which could weigh on the share price from the perceived overhang of future sales while providing more shares available for shorting. To short, traders need to borrow the shares and the small float so far has been this difficult for any large funds to undertake.
Having said that, user engagement initiatives by the company are coming hard and fast, and these should help the company to monetize the continuously increasing traffic.
We have a price estimate of $43 for LinkedIn’s stock, which is well below the current market price.
We will update valuation model based on the secondary share offering in the coming week. Refer to our article Why LinkedIn’s Fundamentals Don’t Support the Market Price on why we think the market is getting ahead of itself on the company.
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