LinkedIn Stock: This Is Why the Bears Are Wrong on LinkedIn Corp

Linkedin StockIt was a bloodbath for LinkedIn Corp (NYSE:LNKD) shares last Friday as LNKD stock plummeted about 40%. LinkedIn’s fourth-quarter earnings beat analyst estimates on revenue and earnings—so what went wrong?

Investor’s instead focused on LinkedIn’s guidance for 2016, which came in lower than expected on weakness in Europe, the Middle East, Asia, and Africa. LinkedIn stock was punished accordingly.

Did the bad news warrant a massive 40% sell-off? Absolutely not. Such an overdone sell-off, especially when the fundamentals of a company have not changed, can provide investors with an excellent opportunity to pick up shares. LinkedIn fits into this story. If you’re patient and hold the stock for the long-term, your investment can pay off nicely.

Let me explain why.

Growth is still impressively high. For the fourth quarter of 2015, revenue grew at a rate of 34%, down from the previous quarter’s 37% growth rate. Revenue for all of 2015 grew 35%. Yes, revenue growth is starting to slow—it was 57% in 2013 and 45% in 2014—but those numbers are hard to sustain longer-term. A 35% growth rate is a “bad” problem any company would love to have. (Source: “LinkedIn Q4’15 Results,” LinkedIn press releases, accessed February 11, 2016.)

For the first quarter of 2016, LinkedIn guided revenue of about $820 million, not the $867 million that Wall Street analysts expected. Even with lowered guidance, that’s still about a 29% jump from revenue from the first quarter of 2015 in a weak economic environment.

Again, although decelerating, membership growth rate is still high. Total members at the end of the fourth quarter were about 414 million, up from 347 million from the same period a year ago. That makes for an impressive membership growth rate of 20%. By comparison, Facebook Inc (NASDAQ:FB) reported membership growth of 14% over the previous year and Twitter Inc (NYSE:TWTR) reported flat growth in its latest earnings reports. (Source: “4Q’15 Quarterly Results Deck,” LinkedIn Investor Relations, February 4, 2016.)

User engagement statistics, a key metric for LinkedIn, are also showing positive news. Page views per unique member on mobile devices grew by about 43%, while content sharing among members grew by about 40% in the fourth quarter year-over-year. These statistics show that LinkedIn is still doing an excellent job in engaging its members.

Talent Solutions, the largest division of LinkedIn and the main source of LinkedIn’s revenue (it accounted for 62% of revenue in the latest quarter), grew 32% year-over-year in the latest quarter, but management forecast that this growth rate would be in the mid-20% range in 2016.

Once again, this is a “bad” problem that any other company would love to have.

Growth in Talent Solutions has a chance to reaccelerate a bit in the next year or two, when LinkedIn reintroduces a redesign of its “Recruiter” platform.

In the latest earnings call, LinkedIn CEO Jeff Weiner said that the “next-generation Recruiter is more intuitive and relevant, and…will increase a recruiter’s ability to find passive talent.”

Weiner also said that in 2016, “we [LinkedIn] will begin our journey toward addressing long-tail hiring by making Recruiter simpler to use.”

Investor expectations were previously so high, that it’s no surprise LNKD took the beating it did on the slightest bit of bad news (which really isn’t so bad). But this has created an excellent opportunity for investors to pick shares of LinkedIn, now that they are relatively cheap.

On a GAAP earnings basis, LNKD has not been profitable for the past two years, but most investors measure the stock on a non-GAAP basis, which takes into account stock rewards to employees. On non-GAAP earnings, LinkedIn’s trailing price-to-earnings ratio is about 36. This is the cheapest it has been in years, hovering in a range of about 75 to 250.

With lots of growth still ahead and a stock price that’s been slashed to make it relatively cheap, LinkedIn just might be a stock worth picking up.

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