LinkedIn Corp (LNKD): Play the Waiting Game

LinkedIn Corp (NYSE:LNKD) provides an integrated social network that meets the needs of business professionals and employers. Its stock returns have been nothing short of extraordinary over the last 16 months. If someone had invested in the stock in late November 2011, he would have had a 100% return by September 2012 and a 200% return by March 2013.

The reason behind this stock price movement has been the company’s phenomenal financial performance in the last two quarters, which surpassed every analyst’s forecast by a huge margin. Before the release of the last quarterly results, analysts expected EPS of $0.19 per share and revenues of $279.93 million. But the company reported EPS of $0.35 per share and revenues of $303.6 million, surpassing all these estimates.

LinkedIn Corp

The company quadrupled its revenue in two years, as the number was $243 million in 2010 and $972 million in 2011. Analysts have always underestimated the revenue generation capacity of the company, and therefore better financial performance as compared to the expectations leads to the stock soaring high.

Overvalued Stock?

The company has a P/E ratio of more than 1,000, which is way higher than even the closest peer in the industry, while the industry average is 28.2. Its P/S ratio is also lower than the industry average. These two ratios suggest that the company is currently overvalued in comparison to its fundamentals and a correction is probable in the short to middle term. However, the EPS growth forecast for the next five years at 61.33% signals that the correction might not be too much. This is also because of the company’s strong balance sheet, zero leverage and robust operating cash flow.

What Will Drive Further Revenue Growth?

The rise in the stock price has come off of exceptional revenue and profit margins. But this growth is not sustainable for a very long time, unless the company keeps innovating like it did when it released a new look for its homepage. This innovation led to a 70% increase in page views since its launch, as it enabled members to discover, share and discuss the professional information that is most relevant to them. In its Q4 conference call, the management discussed all the new features introduced during the last six months. These included a new homepage, integration of LinkedIn Corp (NYSE:LNKD) Today into the homepage, a new version of LinkedIn profile etc. This innovations has been playing a very significant part in revenue generation for the company and therefore have to be continued in order to sustain the advantage for a longer period of time.

Also, acquisitions of rapidly growing companies have to be made to grow its revenues inorganically as well. One of those acquisitions was Slideshare, which experienced huge traffic, reaching over 47 million unique users in Q4, representing a 68% increase over the same quarter last year. Yesterday, the company acquired Pulse, a leading news reader and mobile content distribution platform, at approximately $90 million. The application currently has about 30 million users in more than 190 countries. This will further help the company in its vision to deliver value to its members and become the definitive professional publishing platform.

International growth is also essential for the company. It reported a 38% share of international revenues in total revenues as compared to 33% last year. It is rapidly expanding around the world and is now available physically as well in many countries.