Bright Outlook for LNKD Stock
LinkedIn Corp (NYSE:LNKD) lost almost 50% of its value in a single session last February. Indeed, if you were one of the bargain hunters who picked up LinkedIn stock at about $100.00 per share in early February, you would have enjoyed a 25% return so far.
LinkedIn stock has gradually been recovering. There is the impression that LinkedIn investors are more confident about its two main value drivers: its recruitment service and its job postings business. Essentially, investors have gotten the perception that LinkedIn has improved its visibility and future growth potential. The new growth strategy is slower and steadier, which will likely avoid big surges.
But it will also prevent another collapse, like the one that happened in February. LinkedIn wants to become the king of the stocks that prestigious mahogany-walled investment firms like to promote as examples of disciplined growth. On Wall Street, discipline is a euphemism for avoiding excessive risk. Still, bullish analysts have maintained a 2016 target price for LNKD stock as high as $225.00. If you are more pessimistic, note that the medium target is still a rather interesting $160.00, which still leaves plenty of upside. (Source: “LNKD Forecast,” Financial Times, last accessed May 24, 2016.)
The bullish sentiment has solid bases. LinkedIn’s unique visitors have grown six percent, moving from 100 million to 106 million. LinkedIn also attracted more members. Analysts predicted 427.9 million members, while the actual number was 433.0 million. (Source: “LinkedIn shares soar after big beat on top and bottom,” CNBC, April 28, 2016.) Never before has LinkedIn increased users by such a high percentage—for the record, it’s almost 20%. (Source: “LinkedIn Surpasses Expectations, Offers Positive Outlook,” The Wall Street Journal, April 28, 2016.)
There was another key metric—perhaps a more important one—that grew as well: page views.
LinkedIn has launched a new application designed to help future graduates in their job searches. The strategy, of course, is to retain these young people before they enter the world of work. This opening to younger users has been one of the factors contributing to the rise of overall numbers for LinkedIn. Page views have grown considerably, reaching 45 million, up from 37 million. (Source: Ibid.)
It’s not as if previous results were unimpressive. In 2015, LinkedIn crossed the 400-million-members barrier (414 million, +19% year-over-year) and more than 100 million visitors used the site each month. Users were also consulting pages more than ever and using LinkedIn’s mobile applications in greater numbers as well. Indeed, 2015 was a great year for LinkedIn. The problem has been the predictions for 2016. That is what has been depressing LinkedIn stock.
Yet, it’s only bad news if you bought the stock at its heights. It will go back up to that lofty $200.00 share price again; it will just take some time.
Those investors who are new to LinkedIn can take advantage of its low valuation. The reason is that LinkedIn’s results have been dynamic to say the least. The stock has dropped on guidance. The big plunge last February occurred because for the first quarter in 2016, the California-based company said it expected earnings of $0.55 per share, while analysts wanted to see at least $0.74 per share.
Apart from that, I remind investors that LinkedIn made some expensive acquisitions last year in terms of future growth.
LinkedIn’s main source of income is its recruiting service that allows companies to tap into its vast database of potential candidates. This “Talent” division, which includes recruitment and training solutions, has seen its revenue climb 45% in the fourth quarter of 2015 to $535 million. Considering that advertising generated $182 million and paid subscriptions brought in $144 million in the same period, it’s easy to see why recruitment services is such an important area of focus.
But this shift to services is very expensive. Last year, LinkedIn, for example, paid $1.5 billion to buy the startup Lynda, which is an online course platform. The social network also announced the acquisition (for an unknown amount) of Connectifier, a company specializing in artificial intelligence. (Source: “What LinkedIn’s Acquisition Of Lynda Means For Talent Management,” Forbes, April 28, 2015.)
These are just some of the ways that LinkedIn is trying to attract users—especially businesses. The company has taken a spare-no-expense policy, because it sees this investment as being crucial to its future success.
Apart from the acquisitions, LinkedIn is also spending on marketing and research and development. That’s why the company posted losses of $165 million, against $15.0 million in 2014 and a profit of $27.0 million in 2013. At the stock’s current share price, LinkedIn’s losses and investments for growth have already been absorbed by the market. That’s why so many analysts have set such optimistic targets for the company.
If there is one other concern on Wall Street, it’s LinkedIn’s strong reliance on the U.S. market. The U.S. now accounts for a quarter of LinkedIn’s members and some 60% of its total group sales. LinkedIn has tried to attract more foreign companies, translating its web site into 24 languages. But to really grow, it has to open offices onsite globally. It may face local competition, especially in China, but a resumption of worldwide growth—still below expectations in the advanced economies—will be a favorable factor in this regard.
None of these concerns are new and investors who get into LinkedIn now may be able to take advantage of a company that has an outline for growth with some of its most relevant growth investments already behind it.