LNKD Stock: 3 Reasons to Be Bearish on LinkedIn Corporation

LNKD StockHere’re Three Big Problems with LinkedIn’s Quarterly Results

The biggest online professional networking web site, LinkedIn Corporation (NYSE:LNKD), reported its third-quarter earnings on Friday, beating analyst estimates on both revenue and earnings. LNKD stock shot up over 12% the same day, getting further nudged close to its all-time highs. But LinkedIn stockholders should be wary of its inflated valuation because there are three considerable factors that could send LNKD stock crashing.

Investors are cheering on LNKD’s impressive bull run, citing its competitive moat. The thing that sets LinkedIn apart from its peers, Facebook, Inc. (NASDAQ:FB) and Twitter, Inc. (NYSE:TWTR), is its unique premium service with no big immediate competition threats. However, there are three key factors that investors are missing here, which make me bearish on LNKD stock.

LinkedIn’s Negative GAAP Earnings

Despite reporting a positive non-GAAP earnings per share figure, LinkedIn has yet again returned a GAAP loss this quarter. Long-term value investors look for positive GAAP figures since they deliver a truer picture of a company’s financial health. Non-GAAP figures exclude items like depreciation, foreign exchange translations, and stock-based compensations, and are hence considered loose measures of earnings. (Source: “LinkedIn Announces Third Quarter 2015 Results,” LinkedIn Investor Relations, October 29, 2015.)

LinkedIn has witnessed expenses growing at a rate that far outweighs its revenue growth. The year-over-year growth in revenue in the latest quarter was 37.2%, while the total expenses for the same quarter increased by 45.9% year-over-year. The company has reported an overall loss in the last fiscal year for not having been able to cover its selling and administrative expenses in excess of $1.0 billion. This should terrify LNKD stockholders since the company is currently not in a position to cover its expenses and return profits.

LinkedIn’s International Revenues

Region Revenue Growth
U.S.41.1%
Europe, Middle East & Africa 34.1%
Asia Pacific31.9%
Canada, Latin & South America19.1%

Source: LinkedIn Q315’ Investor Presentation (Slide 11), LinkedIn, October 2015.

LinkedIn reported in the latest quarter that the company has about 70% of its member base outside of the U.S., yet only generates about 38% of its revenue from its international segment. LinkedIn’s biggest international markets, in terms of members, are China and then India. However, revenue growth from this region was not as impressive as from the U.S. and EMEA regions.

LinkedIn’s failure to achieve a higher conversion rate to its premium services in its biggest growth markets raises questions on its mediocre and unfulfilling strategic goals.

LinkedIn’s Deteriorating Ad Revenue

Another key factor LNKD stockholders are missing is LinkedIn’s ad revenue. The company may have a deeper focus on its Talent Solutions segment but cannot simply ignore its Marketing Solutions segment, in light of the increasing expenses. The Marketing Solutions segment grew by only 28% year-over-year in the latest quarter, versus Talent Solutions’ 46% year-over-year growth.

The company currently receives more than half of its traffic from mobile but has no appropriate mobile monetization strategy. Even in their fastest-growing market (China), monetization remains their secondary priority. The narrowed focus on its core business, while ignoring this key segment, will continue to create troubles for the company in covering its expenses.

The Bottom Line on LNKD Stock

LinkedIn’s negative margins and high debt compared to peers are alarming. The company’s weak fundamentals and sluggish growth of monthly active users (MAUs) will continue to be a hurdle in returning positive earnings to its stockholders.

I believe the recent rally in LNKD stock is short-lived and the stock will soon return back to its Thursday’s close price.

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