Earnings Review: Can LinkedIn Grow Margins?
Ishfaque is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
LinkedIn (NYSE: LNKD) adds a great innovative twist to existing social media platforms, i.e. a professional networking kind. And it is performing very well too, LinkedIn now boasts of more than 200 million members on its website. The stock price of the company has done very well compared to the broader market; however, the company's earnings haven't improved much in spite of such strong progress.
Strong Growth All Around
The company's cumulative users have ballooned to 200 million in early 2013 from 145 million at the end of 2011. The company is also getting a lot of user eyeballs as well, comScore ranks LinkedIn as the 23rd most visited site worldwide. Even more impressive is the growth in revenues. LinkedIn's revenues in Q3 2012 were up a staggering 81% year-over-year. All business segments reported strong numbers as well. As more and more companies shy away from job boards like Monster and CareerBuilder, and put more job postings on LinkedIn's portal.
LinkedIn's sales force, which comprises of a big field sales group, did a great job signing up new corporate clients to use LinkedIn's business services. Corporate customers increased 87% year-over-year and ended Q3 2012 with close to 14,000 accounts. And going forward, more corporate clients will come in, as employers move away from traditional website-only portals like Monster and aggregation sites like Indeed.com.
In spite of all these stellar achievements, LinkedIn has a few issues investors should take heed of. The company's revenues are highly dependent upon its Talent solutions business, which brings in almost 55% of net revenues. The company's advertising revenues from the marketing solutions business hasn't taken off. And the revenues from Premium subscriptions have been growing too, but the addressable market of that segment is rather small.
LinkedIn's bottom line hasn't been posting solid numbers either. In the last three years and the first nine months of 2012, the company's net profit margins has ranged from -3.4% to 1.5%. As a result, the growing social media company trades at a sky high P/E of more than 800.
LinkedIn's user engagement has gone down-hill as well, which is a negative sign. The number of Page Views excluding mobile, are down sequentially from having 9.3 billion views in Q2 to 8.9 billion views in Q3. Just like many other firms, mobile is increasingly becoming a key front for LinkedIn. At the end of Q3, roughly 25% of all unique visitors came in from mobile-based devices. Going forward into 2013, this number will almost certainly notch up. However, the LinkedIn's monetization from mobile is minimal, the company started rolling out recruitment postings and expects to post display advertisements on mobile soon.
Competition in Social Media and Advertising
Competition for recruitment dollars stems from mostly traditional websites such as Monster, CareerBuilder etc. However, Monster's partnership with Facebook (NASDAQ: FB) in the build-out of the social jobs app might get momentum in the future. And also, Facebook's Graph search tool will be a force to reckon with for LinkedIn. Facebook has hinted that usage of friends and family for recruitment and networking purposes might be a meaningful tool for its 1 billion users.
Also, LinkedIn's online advertising business faces substantial competition from hundreds of firms and the most notable being the usual suspects of the Internet-era i.e. Facebook, Google, Yahoo etc. Many of these firms have an established user base that frequent their respective sites almost daily and advertisers follow accordingly. Also, the likes of Google and Facebook offer very high end user targeting capabilities which are very difficult to match for competing Internet portals.
In addition, to competing for recruitment dollars and online advertising dollars, LinkedIn competes with many other social networks in existence for user eyeballs and engagement. Google's (NASDAQ: GOOG) social media arm, Google+ is likely getting more traction due to a deep integration with Google Search and YouTube. However, LinkedIn has taken steps to harness user engagement by rolling out new products like Endorsements and Thought Leaders etc.
Also, majority of LinkedIn's traffic comes in from Google's search function, which can be an added headache. Other social media firms, like Twitter and Facebook's very own, Instagram are also vying constantly for users and user engagement as well.
Q4 Guidance and Consensus
LinkedIn's balance sheet is pretty strong with no long-term debt and a cash position of $677 million. The company's management expects to bring in revenues in the range of $270 million - $275million for Q4, 2012, which represents a growth rate of 61%-64% from a year ago. As a result, total revenues for the full year should be in the range of $939 million- $944 million.
The sell-side analysts are modeling an EPS consensus of $0.19 on revenues of $ 279.5 million. The sell-side is expecting LinkedIn's revenues numbers to be ahead of the guidance range. Given the sky high earnings multiple of more than 800 for LinkedIn, a slight miss can be a big negative for the stock price.
The Bottom Line
LinkedIn is a growing social networking platform, and has been posting solid numbers across the board. However, its competitive advantage is not durable in the long-run. Competition in the space will almost certainly increase down the road. The company's revenues are growing at a rapid rate, but the bottom line has been in the low single digits for each of the last 15 quarters, and needs to grow its profit margins in 2013. Given the very high P/E multiple, the company might not be able to sustain the current valuation premium in the long-run.
ishfaque has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google, and LinkedIn. The Motley Fool owns shares of Facebook, Google, and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!