Wall Street has always been completely and utterly obsessed with LinkedIn (LNKD, Financial). It’s not hard to see why. When the networking site launched in 2002, it instantly filled a major digital void for countless white collar professionals. Over a decade on, LinkedIn has become a crucial means of communication and recruitment for over 400 million active users. Better yet, the site’s financials are virtually rock solid.
On Thursday, LinkedIn posted a stellar finale to FY2015. Revenues have shot up 35% year-over-year, traffic is on the rise and premium services are in high demand. By all rights, LinkedIn shareholders should have been jumping for joy. Instead, they’re jumping ship at break-neck speed. The company’s shares plummeted by almost one-third after hours – effectively wiping $7 billion off its total stock market value. At this point, it seems Wall Street’s love affair with LinkedIn is well and truly over.
What the hell happened?
As always, the devil is in the details. No one can deny LinkedIn had a great 2015. The site posted $862 million worth of revenue in Q4 alone, equating to an EPS of 12 cents.
The bulk of that success came from LinkedIn’s Talent Solutions division, with revenues up 45% year-over-year to $535 million. Thanks to a surge in sales, hiring income rose to $1.77 billion across FY2015. Meanwhile, the company’s Learning and Development business brought in a relatively modest revenue of $107 million for the year.
LinkedIn’s marketing operations had a great year, too. Revenue increased 20% year-over-year in the fourth quarter to $183 million. The site’s sponsored updates served as the primary driver of growth in this sector, surpassing 50% of total marketing revenue for the first time. Income from premium subscriptions also rose by around 19% in Q4, bringing in $144 million.
On paper, it seems like everything went right for LinkedIn last year. Unfortunately, the problem with Thursday’s earnings report had nothing to do with the company’s incredible performance in 2015 – the problem is what’s happening in the here and now.
After shutting down part of its B2B marketing service and suffering a series of “weak economic conditions,” investors have been warned not to expect big things this year. Encroaching competition is a huge problem, and sales revenue is expected to tumble by at least 10% in the coming months. That being said, the biggest setback LinkedIn will suffer is completely self-inflicted.
Last April, LinkedIn paid a whopping $1.5 billion for video training website Lynda.com – and at this point, it looks like that investment has yet to pay off. After all, LinkedIn’s Learning and Development division, which houses Lynda.com, only brought in $48.6 million last quarter. Unless things pick up in the next couple of quarters, these sort of assets are clearly going to hurt LinkedIn's bottom line more than they're helping.
They won’t prove a deathblow to the immensely useful website, though. In fact, the board's guidance for 2016 as a whole isn’t awful. Revenue is expected to range between $3.6 billion and $3.65 billion, with depreciation of approximately $380 million and a non-GAAP EPS of at least $3.05. But the first quarter of this year is going to be an incredibly slow one.
LinkedIn is forecasting just $820 million worth of revenue for Q1 – well below the consensus of $866.8 million. This equates to an EPS of just 55 cents, which is about a third under what analysts would have anticipated. That’s admittedly still an improvement on last quarter; however, investors have completely lost their patience when it comes to high-value sites like LinkedIn. Fund managers now want instant results from top tech companies – and unfortunately, social media is sort of a trial-and-error industry.
The markets have been particularly unkind to Twitter (TWTR, Financial), where an exodus of top talent and dwindling ad sales have been chasing away investors like some sort of plague. The popular networking site’s market value has already dropped 60% in the last 12 months, and its earnings report on Feb. 10 isn’t expected to make things any better.
But where does all of that leave LinkedIn? Roughly pressed and folded into its proper place, actually. Until this week, the site had been trading at around 52 times its forward earnings. With a stagnant quarter on the horizon and a FY2016 strategy centred on narrowing its product offerings, a trading multiple like that was simply unsustainable. A sobering drop in value might be just what the company needs.
LinkedIn has suffered a pretty decent blow this week. Yet an impending slowdown should give the board plenty of time to restructure company assets, redevelop its overall strategy and start pressuring high-end investments to yield bigger returns. Who knows? Given time, LinkedIn might even be able to reclaim that $7 billion it lost on Thursday night.
Hopefully, this time the company will actually deserve it.
