LinkedIn: 5 Reasons to Sell

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) has firmly established its presence as the most notable professional platform in the social media space. The company has been growing rapidly in most of the key areas. However, the company's rich valuation and the increasingly crowded social media landscape warrant a look at some of the things that can go wrong with an investment in LinkedIn. Here are five reasons to stay away from LinkedIn's stock:

1. Declining user engagement

LinkedIn has a done a great job of signing up more than 225 million registered users. According to comScore, LinkedIn and the publishing segment, Slideshare, have a combined monthly user-base of 170 million users. However, the time spent on LinkedIn is not rising dramatically. In other words, visitors to LinkedIn are not actively engaging and communicating with other users. Numerous members of the site are quite inactive in LinkedIn's platform, very much in line with Google's social media arm, Google+. 

As LinkedIn is a professional network, users don't visit the site for months. Average page view per member now stands at 53, well below its all-time high of 70 back in Q1-2011. Social media rival Facebook (NASDAQ: FB) has been rapidly converting its monthly active users to daily active users, which hit all-time highs. In Q1-2013, Facebook reported that 60% of its monthly active user base visits its platform every day, which translates into a daily user base of more than 665 million.

The rapidly rising number of social media alternatives for Internet users will likely impact a handful of relatively weaker platforms like LinkedIn and Google+. Many users are shifting towards newer ones like Tumblr, Pinterest, Instagram and Twitter. The increasing number of social platforms is also leading to social media fatigue.

2. High Multiples 

A majority of the company's future upside is already baked into its stock price. In the last quarter, the company's management provided relatively weak guidance, which led to a steep decline in the share price of the company. The company is trading at very high earnings multiples under any scenario. LinkedIn's valuation is rich as measured by its trailing twelve month P/E of 701 and a forward P/E of roughly 86.

On a comparative basis, other leading Internet names like Facebook and Google (NASDAQ: GOOG) have much more reasonable valuations. Facebook is trading at an earnings multiple of roughly 528 and has a forward P/E of 32. Whereas, Google is trading at 27x current earnings and has a reasonable forward P/E of 17. LinkedIn is quite an expensive stock, and it is already priced for perfection. 

3. Growth rates will decelerate

LinkedIn has seen explosive growth rates in almost all of its business segments. LinkedIn's revenue has been growing at high double growth rates for a number of quarters, but that was largely attributable to its small size. As the company gets bigger, its growth rates will trickle down substantially.

The company makes more than 57% of its total revenues from the talent solutions business, and this market segment is not a very big one. It has already taken a lot of market share from other recruiting portals like Monster and Careerbuilder. As a result, the amount of future growth in its primary revenue segment is largely questionable. 

In addition, the company's registered user base of 225 million professional members globally is already a lot. The company has pointed to an addressable market of roughly 600 million professionals across the globe, but a large number of those users are already on board. In a nutshell, future growth in users will likely be a lot slower than the historical levels of 50-70%.

4. Mobile monetization prospects

Just like numerous other businesses, LinkedIn has been generating a lot of user traffic on mobile devices. The company now gets more than 30% of unique visitors on its mobile apps, which is a sizable increase from the 19% the company generated from the year-ago period. However, the real problem lies in monetization. The company's mobile monetization playbook hasn't particularly materialized as expected, largely due to the small screen nature of tablets and smartphones.

LinkedIn did acquire Pulse, which is a content and news distribution application to enhance user engagement levels on mobile. However, it would be largely surprising to see hoards of mobile users utilizing LinkedIn for networking, building recruiting relationships, looking for jobs etc. The secular consumer trend towards mobile-based devices might hurt LinkedIn's user engagement, and subsequently, the amount of revenue the company generates. 

5. Advertising revenues

Linkedin's advertising business has been a laggard for the company. It has been earning only 23% of its total revenues from its marketing solutions business, which is very small for a consumer-centric Internet business. Other leading Internet names like Facebook generate more than 85% of total revenue from advertising both on desktop and on mobile. And the king of online advertising, Google, makes up more than 92% of its own revenues from display and search based advertising. 

While full-fledged focus on advertising is not a good thing for a company, the sheer size and the rapid growth of the online advertising space makes it a very lucrative one for any Internet business. The online advertising marketplace is a much bigger and more competitive one than LinkedIn's core recruiting solutions business. The company is trying to address its marketing solutions business by allowing companies to provide sponsored updates (just like Facebook), but that is unlikely to move the needle much. 

The Takeaway

There are some legitimate concerns regarding the company's future growth potential with regards to signing up newer users, as well as roping in more recruiters and advertisers on its platform. The company has taken steps to stimulate users on its platform by introducing newer products like Influencers, but the impact of that is not likely to be prolonged. LinkedIn should try to introduce newer products to drive incremental usage and user traffic on its platforms in order to justify its current valuations. 

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Ishfaque Faruk 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!

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