First quarter earnings and guidance
For its first quarter, LinkedIn earned $0.20 per share, or $22.6 million, up from the $0.04 per share, or $5.0 million, it earned in the prior year quarter. Excluding one time charges, the company earned $0.45 per share, easily topping the $0.31 that analysts had expected. Revenue surged 72% to $325 million, topping the consensus estimate by $7 million.
Although LinkedIn Corp (NYSE:LNKD)’s first quarter looked fine, its guidance for the current quarter and full year spooked investors. The company now expects second quarter revenue to come in between $342 million to $347 million, below the analyst forecast of $360 million.
For the full year, LinkedIn expects to generate between $1.43 billion to $1.46 billion in revenue, also lower than the $1.49 billion that analysts had expected. Full-year EBITDA, which is often used as a clearer gauge of profits for growing companies like LinkedIn Corp (NYSE:LNKD), is also expected to come in light at $330 million to $345 million, lower than the estimated $363 million.
The fundamental tightrope
LinkedIn is a victim of its own success. Considering that the stock has risen more than 80% over the past twelve months despite having a trailing P/E of over 1,000, fundamental gravity was bound to catch up sooner or later. The good news for LinkedIn Corp (NYSE:LNKD) is that unlike other recent social media stocks, such as Groupon Inc (NASDAQ:GRPN) and Yelp Inc (NYSE:YELP), the company is actually profitable. The bad news is that Wall Street still expects too much growth from the company.
LinkedIn generates revenue in two primary ways: recruiting services and advertising. LinkedIn’s recruiting service charges companies for a premium tracking product that helps them track job candidates, post job openings and organize applications. That segment contributed $184.3 million to its top line during the quarter – 57% of the company’s total quarterly revenue, up from 53% a year earlier. This is a major advantage that LinkedIn has over other growing Internet competitors – its main source of revenue is not display advertising. In addition, 40% of LinkedIn’s revenue came from international markets.
Revenue from display ads rose 56% to $74.8 million, and sales of premium subscriptions for job seekers surged 73% to $65.6 million. However, the company warned that its advertising growth would experience “more moderate growth” than its other business segments, since its new mobile news feed ads, similar to Facebook Inc (NASDAQ:FB)’s , were still in the testing phase. LinkedIn recently acquired popular social news aggregator Pulse to enhance its news content to keep users signed in for longer periods.
During the quarter, LinkedIn Corp (NYSE:LNKD)’s member base increased by 7.9% to 225 million, roughly double the size of the user base at the time of its IPO. By comparison, Twitter has 200 million active users, Google+ has 359 million, while Facebook Inc (NASDAQ:FB) has 1.1 billion.
All of these positive numbers were driven by a growing job market both at home and abroad, and an increasing rate of adoption by students, who have grown accustomed to the constantly connected social-networking world of Facebook Inc (NASDAQ:FB) and Twitter.
But all these positive catalysts were not enough for Mr. Market, who was expecting even higher growth on par, percentage wise, with last year’s feverish growth. Therefore, shares plunged 10% after hours on May 3.
Widening moats
Unlike other Internet startups, LinkedIn has a wide defensive moat. Companies such as Groupon Inc (NASDAQ:GRPN), Yelp or Internet-radio station Pandora Media Inc (NYSE:P) can easily be swept away by larger companies replicating the same experience.
Meanwhile, LinkedIn has the same advantage as Facebook – brand recognition and sector dominance. More people sign up for Facebook than Google+ for one simple reason: it’s where all their friends are. People register for LinkedIn for the same reason: that’s where they can find all the employers and job seekers. Right now, it would be nearly impossible to crack LinkedIn’s share of the social jobs market, so it would be a futile, money-wasting effort to even try.
LinkedIn’s only real competitor is Monster Worldwide, Inc. (NYSE:MWW), the parent company of Monster.com, which was once the largest job search site in the United States. Monster Worldwide, Inc. (NYSE:MWW), which was founded in 1999, survived the dot-com bust only to die a slower, more agonizing death over the following decade.
LinkedIn, which was launched in 2003, made Monster’s top-down search format seem clumsy and outdated by comparison. The launch of Facebook in 2006 changed how Internet users interacted with each other, a trend that LinkedIn was tuned into but Monster Worldwide, Inc. (NYSE:MWW) was oblivious to. By 2010, metasearch site Indeed.com pushed Monster.com down to a distant third in most-visited U.S. job sites. What happened to Monster over the previous five years hasn’t been pretty.
Although Monster recently reported earnings that topped pessimistic analyst estimates, the outlook is still dire for the company, with a possible sale as the only salvation for this fallen giant.
Despite the lack of immediate competition for LinkedIn, investors should watch for any unusual shifts in strategies from Facebook.
Facebook has long been considered a possible competitor, since it can easily add a job search service for employers to its site, considering that many users have already added detailed education and work histories in their profiles. The main barrier that Facebook faces is its perception as a casual social site. “Friending your boss on Facebook” is often considered a major faux pas.
However, if Facebook were to launch a separate service for professionals, tapping into the same shared data as its social site but blocking out private photos, videos or status updates, it could instantly create a social jobs network larger than LinkedIn.
Meanwhile, Google Inc (NASDAQ:GOOG) is sometimes cited as a possible entrant in the job search industry, but for now it lacks the social firepower of Facebook. However, if Google+ keeps growing, then a Google Inc (NASDAQ:GOOG) Jobs search engine might not be that far down the road.
I believe that LinkedIn is still a growth stock, and not a bubble about to burst. However, the stock might be due for a major pullback soon, and its overheated P/E ratio makes it an easy target for shorts to take down, so I think investors should wait to see how the next few weeks play out.
As long as LinkedIn can keep growing its user base, prioritize growth in recruitment services, and steadily grow its advertising business into a strong secondary revenue stream, the company will have a bright future ahead, and eventually its P/E ratio will reconcile with its price growth.
The article Is it Time to Buy LinkedIn? originally appeared on Fool.com and is written by Leo Sun.
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