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Is LinkedIn Corp Stock a Buy?

By Tim Brugger – May 11, 2015 at 12:20PM

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After its huge sell-off, is the professional networking king in long-term trouble, or is it a great value investors should pounce on?

Even investors that follow LinkedIn (LNKD.DL) closely likely didn't see its precipitous stock price drop following Q1's earnings announcement coming. Down over 25% from pre-earnings call levels, LinkedIn performed admirably in its first quarter compared to 2014, but guidance for the balance of the year initiated a panic-ridden sell-off.

Of course, for value investors, LinkedIn is an intriguing story right now. The question is whether LinkedIn is a compelling, long-term opportunity, or is its depressed stock warranted? Yes, there's some light at the end of the LinkedIn tunnel, but there are also serious questions that need to be addressed.

What's all the commotion?
Generally, announcing a 35% jump in revenues year over year, and a 50% increase in non-GAAP (excluding one-time items) earnings-per-share, as LinkedIn did in Q1, would be cause for celebration. LinkedIn also impressed with its continued member growth.

Even as social media wannabe Twitter (TWTR) grew its monthly average users (MAUs) an anemic 14 million last quarter, LinkedIn added another 17 million members, and now boasts 364 million. To put that into perspective, Twitter has just 302 million MAUs and its potential user base is much more diverse than LinkedIn's targeted market of professional networkers and jobs seekers. That's the good news.

It was bad news surrounding LinkedIn's forecast for the remainder of the year that hit it hard, though projected revenues between $670 million and $675 million this quarter would be about a 25% jump from last year. Again, not bad in and of itself. However, the other shoe was about to be dropped.

Missed it by that much
After fielding a litany of questions regarding drastic declines in projected EBITDA (earnings before interest, taxes, depreciation and amortization) and earnings the balance of 2015, it become apparent CEO Jeff Weiner and CFO Steve Sordello couldn't wait to end LinkedIn's earnings call.

The slew of questions followed the news from Sordello that projected earnings for the year would drop from the expected $2.95 a share to $1.90, and EBITDA would be around $630 million as opposed to the $785 million it expected just a quarter ago. Is it any wonder LinkedIn's stock price is sitting below $200 a share as of this writing?

The long road back
There were several factors contributing to LinkedIn's lowered guidance. Somewhat surprisingly, Sordello said LinkedIn underestimated the costs associated with customer acquisition. That's surprising because of LinkedIn's sales force hiring spree -- it doubled the number brought on over last year -- a full 60% of its customers had a new account rep.

The result was more customer churn, fewer up-sells, and higher expenses associated with getting the new reps up to speed. Seems like Weiner and Sordello should have seen those sales and cost hits coming. Instead, LinkedIn was taken by surprise.

The $1.5 billion deal for professional training provider will also weigh heavily on LinkedIn this year, both in increased costs and higher stock-based compensation expense. However, it doesn't appear will add much of anything to LinkedIn's top line for a long while. As per Sordello, should generate about $20 million to $25 million in sales this year. As per Weiner, is a long-term opportunity, not a near-term boost.

Adding fuel to LinkedIn's sell-off fire was news that banner ad sales were off 10%, and that decline in its Market Solutions unit is expected to continue. The problem is Talent Solutions, as of last quarter, made up 62% of LinkedIn revenues, compared to 57% in Q4. With on board, and declining Marketing revenues, LinkedIn's hopes of further diversifying its revenue sources don't look promising.

Where does all of the above leave investors? Long term, Weiner and team will likely assimilate, solidify its workforce, get a hold on expenses, and turn the corner on improving results from its Marketing unit. But there's no hurry. Waiting for some positive signs LinkedIn is making strides in the aforementioned key areas before diving in wouldn't hurt. But don't wait too long, because over the long haul, there's certainly more upside than down where LinkedIn is concerned.

Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends LinkedIn and Twitter. The Motley Fool owns shares of LinkedIn and Twitter. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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