LinkedIn (NYSE:LNKD.DL) is a particularly volatile stock. Shares of the online recruiting and professional contacts network fell 27% in the last quarter, as investors were deeply disappointed with earnings guidance for the second quarter of 2015.
LinkedIn is a relatively young business, and the company is investing heavily into growth, so it is hard to tell how things could evolve with margins and earnings in the coming quarters. However, from a long-term point of view, the recent decline in LinkedIn shares could be a ripe buying opportunity for investors.
The reasons behind the decline
The numbers for the last quarter were actually quite strong. Total revenue grew 35% year-over-year, reaching $638 million. Adjusted EBITDA was $160 million, or 25% of revenue, while adjusted earnings per share came in one cent above Wall Street forecasts at $0.57.
However, investment decisions need to be made on a forward-looking basis, not on past performance, and management guidance for the second quarter was a big disappointment for investors.
The company is aggressively investing in areas such as R&D and human talent, and this is squeezing profit margins. Also, LinkedIn recently announced the acquisition of Lynda.com -- a leading online learning company -- for $1.5 billion, and this means increased integration expenses and approximately $24 million in additional stock-based compensation expenses during the second quarter.
On the revenue front, LinkedIn is rearranging its sales force, and that is causing some additional friction. Foreign exchange fluctuations are a drag on growth, too. In this context, LinkedIn is expecting revenues for the coming quarter to be in the rage of $670 million to $675 million, substantially below the $718 million in sales Wall Street analysts originally forecasted.
The long-term view
It is never nice to see a company announcing guidance below expectations, and investors may want to monitor performance closely in the coming quarters, only to make sure that the recent disappointment was just a bump in the road for LinkedIn, as opposed to a continuing trend.
On the other hand, LinkedIn looks exceptionally well positioned to continue expanding rapidly over the years to come, and the long-term opportunity could easily justify the short-term risk in LinkedIn stock.
As opposed to companies such as Facebook and Twitter, which make most of their money from online advertising, LinkedIn has a diversified business model, and the company is the undisputed leader in its main professional contacts and recruiting business.
The talent solutions segment consists of recruiters and hiring companies who pay LinkedIn to have access to potential job candidates. This segment produced 62% of total revenues during the last quarter, and sales grew by an impressive 36% over the year-ago period.
Premium subscriptions offer different plans for LinkedIn members to upgrade the service. Upgrades provide tools to enhance job search, sales, or networking capabilities, and they produced 19% of sales during the period, growing by 28%.
Marketing solutions basically consist of online advertising, which brought in 19% of total revenues during the last quarter, with sales increasing by 38%,
The business is a textbook example of the network effect at play as a major source of self-sustaining competitive advantage. The bigger the platform, the more valuable it becomes for both job candidates and companies looking for employees. Companies and individuals attract each other to LinkedIn, so the business becomes stronger and more durable as it gains size over time.
LinkedIn is well past the inflection point when it comes to scale and establishing its relevancy. The company ended the last quarter with 364 million members, a 23% annual increase. Unique visitors grew 18% to an average of 97 million per month, and member page views grew 30%, well ahead of unique member growth. The fact that page views are outgrowing members is clear sign of increasing engagement among those members.
Mobile activity is growing at double the rate of overall member activity, and it already represents more than half of all traffic to LinkedIn. This trend shows that the company is firing on all cylinders in this key segment.
LinkedIn has 34,764 corporate solutions customers as of the end of the last quarter, up 35%. The company has now surpassed 3.5 million active job listings, and job applications through LinkedIn grew more than 50% year-over-year during the last quarter.
In a nutshell, LinkedIn is well on track to continue capitalizing its opportunities for growth in a market that management estimates could be worth as much as $115 billion. With this in mind, recent weakness in LinkedIn stock looks much more like a buying opportunity than a reason to run away from the company.