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What 3 LinkedIn Bulls Think After Last Week's 40% Drop

By Steve Symington, Evan Niu, CFA, and Tim Brugger – Feb 10, 2016 at 5:12PM

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Three Fools explain why the market got this one wrong.

Credit: Wikimedia Commons.

When LinkedIn Corporation (LNKD.DL) released fourth-quarter 2015 results late last week, the words of CEO Jeff Weiner seemed to contradict the market's swift negative reaction to the report.

Q4 was a strong quarter for LinkedIn bringing to a close a successful year of growth an innovation against our long-term roadmap. We enter 2016 with increased focus on core initiatives that will help drive growth and scale across our portfolio.

Why, then, did LinkedIn stock plummet 40% the following day? We asked three Motley Fool contributors for their thoughts on the stunning drop. Read on to see what they said, and why they're still bullish on shares of the business-oriented social network.

Evan Niu, CFA: Wow. Just wow. That was brutal. Although I can't say that I'm all that surprised given current market conditions. Right now, investors have really itchy trigger fingers when it comes to that big red "sell" button, so any shortfall in results can easily lead to unrelenting sell-offs, particularly for high-multiple stocks like LinkedIn.

To be clear, there were some glaring soft spots in LinkedIn's latest quarter, mostly around guidance for Q1 2016, as well as full-year 2016. Full-year sales outlook of $3.6 billion to $3.65 billion absolutely qualifies as revenue deceleration compared to 2015's growth, even at the high-end.

It was also somewhat concerning that LinkedIn is shuttering Lead Accelerator less than a year after launching the service, since scaling the product would require more resources than management had initially anticipated. But does any of that really warrant a 40% sell-off?

LinkedIn added 3,000 new corporate solutions customers during the quarter, and now has more than 42,000. This is one of the most important metrics for LinkedIn; three years ago, the company had just 16,400 corporate solutions customers. Sales Navigator also continues to grow, and is now an important driver for the Premium Subscriptions business. Meanwhile, China is still in the early innings.

Shares have now fallen all the way back down to 2012 levels. But is the business stronger now than it was back then, with more areas for potential growth opportunities? I think so.

Tim Brugger: By most accounts, LinkedIn's recently announced Q4 and 2015 annual earnings results surpassed expectations. But as LinkedIn fans know all too well, guidance for the current quarter and year did not impress, to say the least.

However, before LinkedIn bears get too excited, there are a couple of factors to consider that, when put in context, make it a compelling value play at these levels. Yes, the $820 million in sales this quarter, and expected $3.6 billion to $3.65 billion on an annualized basis, were below analyst estimates. But not by nearly enough to warrant what has now become an approximately 50% drop in LinkedIn's share price.

The Street was expecting LinkedIn to generate $867 million in Q1, and $3.9 billion for the year: about 5% and 7% "misses," respectively. Nothing to brag about, but worthy of an almost instantaneous slide of 40%? Particularly considering that LinkedIn has consistently beaten guidance, as it did last quarter and year. Don't be too surprised to hear it report results closer to expectations than its own forecast would suggest.

And those less-than-expected results? On a quarterly and annual basis, both are significantly above last year's revenue of $637.7 million in Q1, and $2.99 billion annually. LinkedIn has long traded at a high multiple based on non-GAAP (excluding one-time items) earnings. Now? It's trading at just 24 times future earnings -- half of what LinkedIn shareholders have become accustomed to over the years.

Overselling on "bad" news is nothing new. Like it or not, momentum plays a near-term role in stock price. But that momentum can also offer an opportunity for long-term growth investors, which is exactly what LinkedIn has now become.

Steve Symington: I'm not often shocked when the market overreacts to any given company's quarterly results these days. To add perspective on these kinds of sharp daily moves is, after all, the primary reason the Fool maintains its "10% promise" series of articles. But I'm fairly positive my jaw unintentionally fell after witnessing LinkedIn's 40%+ drop last week, and the first thing that came to mind was that there must be some sort of thesis-crushing development that emerged in its latest earnings report.

But there wasn't -- at least, apart from the guidance shortfall Evan and Tim described above, with which I don't think long-term investors should be terribly concerned in these early stages. In fact, LinkedIn's fourth-quarter performance was largely solid, exceeding its own guidance on both revenue and earnings. And though growth will decelerate in the coming year, LinkedIn should still benefit over the long term from investments it continues to make to grow its business.

Referring to the drop, even LinkedIn CFO Steve Sordello admitted he was "pretty surprised at the magnitude of what we saw" as he spoke at the Goldman Sachs Technology and Internet Conference earlier this week. Sordelo elaborated, "We really haven't seen anything fundamentally change in the business."

In the end, while the market has undoubtedly soured on LinkedIn's prospects in the near term, I'm convinced patient investors willing to take advantage of this pullback will be rewarded handsomely going forward.

Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends LinkedIn. 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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