LinkedIn Sales Were Solid But Costs Are Still A Concern

by Trefis Team
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LinkedIn (NYSE:LNKD) recently released its Q2 2012 earnings. We are updating our forecasts but there are a few key aspects of the earnings that we believe should be of interest to investors. There is doubt that growth across several metrics remains strong for LinkedIn as more professionals and companies continue to adopt the platform. Even though the overall company revenues grew by an impressive 89%, we should not forget the small base for the growth.

In its relatively early stages, LinkedIn is bound to grow at a high pace on its more targeted and social approach to recruitment. We estimate that Recruitment Services & Job Postings division constitutes close to 45% to LinkedIn’s estimated value, and hence its largest business. This is inline with the recent results where revenues for this division grew by more than 100%, which is much higher than that for its overall revenues.

See our complete analysis for LinkedIn

Furthermore, the company has close to 106 million unique monthly visitors (excluding slideshare), implying 30% growth compared to Q2 2011. If we compare this growth to the overall revenue growth, we conclude that overall monetization has improved and the revenue growth is not merely a result of more members joining in.

While revenue and membership growth remains impressive, costs are still a concern, at least in the short term. LinkedIn has little direct costs and thus high gross margins. However the company’s SG&A and R&D costs that are quite high at the moment.

Over time, LinkedIn will be able to leverage its higher base to bring these costs down but, for now, it seems these costs are likely to remain high. In fact, sales and marketing costs, the biggest component, increased as proportion of revenues compared to Q2 of 2011. LinkedIn has also stated that taxes are likely to remain high in the short term.

Investors should also be cautious about LinkedIn’s profitability. For the short term, the costs are likely to remain high and the stock seems quite expensive as per our estimates. Refer to our previous article Why LinkedIn Is Dramatically Overvalued At A Near 1,000 P/E to understand why the company may be overvalued currently.

Our current price estimate for LinkedIn stands at $44, implying a discount of about 60% to the market price.

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