I am a value investor who believes in keeping investments for a long-term rather than frequent trading and timing the market. To add to it, I am most wary of trading in high volumes during the earnings season because of the higher volatility that a stock encounters during that time. Take the case of Facebook (FB, Financial) for instance, which saw a reasonable selling season a couple of days back in spite of delivering solid results. Apparently, investors triggered a selling session for Facebook because of the uncertainty about a humongous increase of 50/75% in expenses in coming fiscal. The latest victim of an investor sell-off has been LinkedIn (LNKD, Financial), which also reported strong results but guided light.
The result
A few days back, the social giant which has created a niche market for itself, reported its third quarter results wherein it reported a growth of 45% to $568 million. Besides, adjusted EBITDA for the third quarter was $151 million, or 27% of revenue, compared to $93 million for the third quarter of 2013, or 24% of revenue. The GAAP diluted EPS for the third quarter was $(0.03), compared to GAAP diluted EPS of $(0.03) for the third quarter 2013; non-GAAP diluted EPS for the third quarter was $0.52, compared to non-GAAP diluted EPS of $0.39 for the third quarter of 2013. It is important to note that the non-GAAP measures exclude the tax-affected stock compensation expense and tax-affected amortization of acquired tangible assets.
The right hand of LinkedIn
One of LinkedIn’s biggest revenue gainers and an important segment is the Talent Solutions which contributed approximately 61% to the overall revenue. In Q3, the revenue for LinkedIn’s Talent Solutions group, increased a whopping 45% to $345 million. The objective of the company with regard to this burgeoning segment is to power the world’s hires, increasing achievable as the LinkedIn network expands globally. New tools in company’s flagship Recruiter product allow recruiters and hiring managers to find professionals that are not just great fits for specific jobs, but identify the best possible fit for their particular companies. This functionality will be available beginning in 2015.
The better way to describe LinkedIn’s Talent Solutions business is that the company intends to become the preferred choice for recruiters. Basically, LinkedIn is striving to provide recruiters with various tools that also cover data visualization techniques, in order to fit the right candidate for the job. Since its 2003 launch, LinkedIn has become an indispensable tool for recruiters to manage the potential pool of candidates. The social platform offers an official "Recruiter" profile option, which allows recruiters to search the entire network beyond just their personal connections and track outgoing queries. To summarize, it is amply clear that opportunities exist in the Talent Solutions segment and since the company already has planned a launch of tools in upcoming fiscal, it will definitely enhance the operating numbers.
More on other segments
While Talent Solutions occupies around three-fifths of the revenues, the other two-fifths is taken by Marketing Solutions and premium subscriptions. The revenue from Marketing Solutions products totalled $109 million, an increase of 45% compared to the third quarter of 2013. Marketing Solutions revenue represented 19% of total revenue in the third quarter of 2014 and 2013. On the other hand, revenue from Premium Subscriptions products totalled $114 million, an increase of 43% compared to the third quarter of 2013. Premium Subscriptions represented 20% of total revenue in the third quarter of 2014 and 2013. The primary reason behind letting out these numbers specifically, is to give you a holistic understanding of LinkedIn’s business. Basically, the company has been performing well on an overall as well as on a segment basis.
An aberration but a highly advantageous factor for this job-hunting site has been its increasing presence in China. We know that China has banned most of the U.S. websites from functioning in the region owing to a host of reasons that include privacy, data breach etc. However, for LinkedIn, China has emerged as a lucrative destination and a bigtime contributor to network’s growth. In fact, it can be said that LinkedIn is the first American company to achieve Internet success in China. For now, it has only 5 million members in China, but we also need to consider that China holds a population of more than 100 million professionals, each of whom is a potential member for the company. Also, the Chinese entrepreneurs have not been able to replicate a model similar to LinkedIn and that has been a big reason for its success in this region.
Takeaway
LinkedIn’s stock saw a brief sell off session on the exchange after its results because of a soft guidance. The company said that it expects Q4 revenue of $600M-$605M and EPS of $0.49, below a consensus of $611.6M and $0.52. However, investors should not be derailed by these numbers because of a couple of reasons. Firstly, LinkedIn has a history of announcing a soft guidance and then deliver over and above that. The second reason is that it is not possible to accurately measure the impact of innovations that have not been launched yet. LinkedIn has big plans on creating innovative solutions that will drive its hiring business and therefore, these would have a reasonable revenue impact. As such, the guidance should be taken as just indicative and an investor should put his/her money in the stock for its fundamental strength.
