LinkedIn (LNKD, Financial) has been one of the best stocks in the market over the last few years. The company has been beating analyst estimates nearly on every earnings event.
After the release of the most recent quarter results, however, shares of LinkedIn fell by more than 50% from a pre-earnings price of about $205 to $100 per share within nine days to mark the company’s worst post-earnings performance since going public.
LinkedIn shares fell by more than 40% on the first day following the company’s earnings release. While LinkedIn has historically been very volatile during post-earnings trading sessions, the recent 40% plunge compared with its usual fluctuations of about 10% either direction raises a lot of questions with regard to investors’ confidence in the stock.
Shares of LinkedIn now trade at a P/S ratio of about 4.7x compared to its three-year average of about 12x. As of Jan. 29 this year, shares of LinkedIn had a short ratio of 3.47% for the month. Since reporting its earnings at the beginning of the month, shorts might have increased for the current month as fears grow that the stock may fall further. Nonetheless, LinkedIn stock price appears to have stabilized at around $107 to $110 over the last few trading sessions.
While LinkedIn continues to report significant revenue growth, net income has failed to keep up with the trend over the last five fears and it slumped into negative territories in 2014 and 2015. In the fiscal year 2015, LinkedIn reported a net loss of $166 million or $1.29 per diluted share. This compared to a net loss of $15.7 million reported in fiscal year 2014, or 13 cents per share.
On the other hand, revenue increased by more than $780 million to about $3 billion in 2015, compared to about $2.22 billion posted in 2014, thereby representing about 35% revenue growth year over year.
Nonetheless, it is important to note that LinkedIn’s revenue growth rate has been declining over the last few years compared to the 86% growth posted in 2012. In 2013, the company’s revenue grew by 57%, while in 2014 the rate dropped to 46%. It is clear that as the company’s revenue levels increased from one year to the next, the growth rate continued to drop.
LinkedIn collects most of its revenue from the Talent Solutions business unit, and in the most recent fiscal year, the company generated $1.877 billion from this unit, while the other two business units Marketing Solutions and Premium Solutions generated $581 million and $532 million.
The company’s talent solutions unit has two revenue streams including hiring, which brought in about $1.77 billion in revenues last year, while L&D (learning and development) garnered $107 million. Based on these metrics, it is ideal to say that LinkedIn’s primary business comes from hiring, and this is the unit that links employers with potential candidates.
In April, LinkedIn bought enterprise development platform Lynda.com for $1.5 billion. LinkedIn looks to integrate Lynda.com to its talent solutions business model in a bid to address skill development for HR professionals and employers. As such, LinkedIn will be maximizing the potential revenue from its leading business unit.
In this past fiscal year, Lynda.com generated $49 million in revenues. However, this platform has a huge potential especially now that LinkedIn is weaving it into its talents business model. Employers and HR professionals spend a lot of money on training programs and workshops, and Lynda.com is well-equipped to handle that.
LinkedIn’s net income may have slid to negative territories over the last two years, but part of this decline can be attributed to its increased investment in R&D. In 2015, the company invested $775 million in R&D, which is an increase of about $240 million from the amount invested in 2014.
As such, it is quite clear that while net income has been hard to come by over the last few years, the company has been doing a great deal of investing in products that could lead to long-term growth.
Will LinkedIn survive the current fall in stock price?
After falling by about 50%, many would wonder where the company's stock price goes from here. There are those who believe that the stock is still expensively valued based on expected earnings growth. However, the company still expects to report positive non-GAAP EPS for 2016.
Between 2012 and 2014, the company increased its investment in R&D by an average of $100 million. Had it maintained those levels in the recently concluded fiscal year, the company could have reported a much better net loss, perhaps just a small step from the previous figure of about $15 million. With that, perhaps investors would have had a different view.
LinkedIn also issued a weak guidance of about $3.60 billion to $3.65 billion for fiscal 2016 revenue compared to analysts’ estimates of about $3.91 billion. The company’s guidance for non-GAAP EPS was also dwarfed by Wall Street expectations at $3.05 to $3.20 compared to $3.67 consensus. This suggests that there could be some room downwards for the company's stock price.
LinkedIn currently trades at about 4.7x in P/S, which compares to the industry average of about 3.44x. As such, the stock appears to be significantly expensive when compared to peers. LinkedIn has historically traded at higher P/S ratios when compared to the industry average, which means this valuation multiple shouldn’t be a hindrance in the stock’s efforts to climb.
As for now, the stock appears set to trade at current levels for some time, at least until the company posts its first quarter of 2016 results. But it could be a long way back to the top.
Disclosure: I have no position in any stock mentioned.
