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Read This Before You Sell LinkedIn Corp. Stock

By Daniel Sparks - May 9, 2015 at 12:00PM

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After a panicky market sell-off of LinkedIn stock, are you worried LinkedIn stock will continue lower? Read this first.

With LinkedIn (NYSE: LNKD) stock trading about 20% lower this month, after the stock tumbled when it reported first-quarter results on April 30, some worried investors may be considering selling the stock. But a closer look at LinkedIn's underlying business shows exiting this winner could be a mistake. LinkedIn still has the characteristics of the sort of company long-term investors would want to see in the companies in their portfolio.

Why did LinkedIn stock tumble?
Was LinkedIn stock's 20% sell-off merited in the first place? To explore whether or not it was, here's the backstory on the reason for the sell-off.

LinkedIn's first quarter results were actually solid. The company's revenue and non-GAAP EPS exceeded its guidance for $618 million-$622 million and $0.53, respectively. Actual results were revenue of $638 million and non-GAAP EPS of $0.57. Indeed, LinkedIn even exceeded analyst estimates for revenue and EPS of $637 million and $0.56, respectively.

So, what spooked the market? The key culprit was LinkedIn management's decision to lower its outlook for the rest of the year. When LinkedIn first shared its outlook for 2015, the company expected revenue of $2.93 billion-$2.95 billion and non-GAAP EPS of $2.95. The new guidance figures for 2015 provided by management when it reported first-quarter results were revenue of $2.9 billion and EPS of $1.90. The big surprise, here, of course, was the huge drop in expected non-GAAP EPS.

Management pointed to its recent announcement that it has agreed to acquire lynda.com, a leading online learning company, as the main reason for the reduced outlook for EPS. Costs associated with the transaction itself, as well as costs related to the integration of lynda.com's business to LinkedIn, will affect the company's profitability in the near-term. Longer-term, of course, LinkedIn expects lynda.com to be a boon for the company's financials.

So, was a 20% sell-off merited? Not really. The long-term story for LinkedIn remains the same.

Two concrete reasons not to sell LinkedIn
Beyond the market's overreaction to LinkedIn's reduced guidance, there are concrete reasons the professional social network looks poised to be a excellent performer in the long-term.

1. A solid business model. Unlike its social network peers, LinkedIn's revenue model relies very little on advertising. Its marketing solutions segment, which includes revenue from display ads, sponsored InMails, Sponsored Updates, LinkedIn Ads, and Ads API, accounted for just 19% of the company's revenue. The majority of LinkedIn's revenue comes from its talent solutions segment, at 62% of total revenue. Even the company's premium subscriptions segment revenue competes with its marketing solutions revenue, also at 19% of total revenue. LinkedIn's revenue, therefore, is more diversified from social peers who rely heavily on advertising.

Further, all three of LinkedIn's business segments are growing at healthy rates. Talent solutions, marketing solutions, and premium subscriptions reported year-over-year revenue growth of 36%, 38%, and 28% in Q1.

2. Engagement is still rising rapidly. The professional network is still making formidable gains in member engagement. To put its increasing engagement in perspective, consider that LinkedIn's member page views are growing considerably faster than unique visitors.

2: Based on monthly average during the quarter. 3: Based on total during the quarter. Chart source: LinkedIn.

Between Q4 and Q1, member page views jumped 13.3% sequentially. During the same period, unique visiting members increased just 4.3%. Even more, the sequential rate of growth in member page views between Q4 and Q1 was actually increased compared to the 7.1% growth between Q3 and Q4.

Despite the market's panicky sell-off, LinkedIn still looks like an excellent business to hold for the long haul.

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