Despite solid earnings and growth numbers, LinkedIn's (NYSE:LNKD.DL) stock plummeted 40% after its earnings call in early February.
In this segment, Motley Fool analysts Dylan Lewis and Sean O'Reilly go over the company's growth history and explain why LinkedIn's guidance did so much damage to its stock price.
A transcript follows the video.
This podcast was recorded on Feb. 26, 2016.
Dylan Lewis: So, the issue here was not the report numbers, as we talked about. Quarterly revenue $862 million, 34% increase over a comparable prior year period. They beat forecasts of $845 million to $850 million. Adjusted EBITDA was $249 million, which was beyond management's guided range of $210 million. And just to look at some of the business segment growth, Talent Solutions, which is roughly 2/3 of their total revenue, grew 45% year over year --
Sean O'Reilly: (whistles)
Lewis: -- to $535 million. Marketing Solutions and Premium subscriptions grew at 20% and 19%, and those are their three major --
O'Reilly: Well, yeah, and it's not surprising that Talent Solutions is two-thirds of their revenue, and that's what they do for basically professional recruiters and all that stuff.
Lewis: Yeah. And just as a refresher for the listeners, Talent Solutions Recruiting are generally the recruiting and hiring tools. Marketing Solutions is more of the content marketing, ads, things like that that would show up in your feed. And Premium subscriptions, their other segment, job seekers, recruiters, it's a range of individual users to small-scale recruiting and HR efforts.
O'Reilly: So, again, those were great results. The problem was guidance. Was it that low? Because they grew it, like, 30-35% in most of their segments.
Lewis: Yeah, management offered a revenue target of between $3.6-3.65 billion for fiscal 2016. And basically, at the mid-point of that target range, LinkedIn is pegging revenue growth at about 21% next year. And you look back at what they've done the past couple years, 2013 has year over year growth of 57%, 2014 45%, 2015 35%, and now, they're pegging to 21% for 2016.
O'Reilly: Right. That's a really nice graph you made, by the way. I wish our listeners could see this.
Lewis: It's a nice little chart, yeah, I thought. I was very proud of myself. So, you're seeing that decline happen. And so, part of the frenzy here is slowing growth. And you've been seeing this march down, down, down, over time. It's not crazy. Obviously, as the denominator get larger, growth rates are going to slow.
O'Reilly: Is it ... we'll probably talk about this more in a bit, is it a growth saturation type of thing? Are they just as big as it's going to get, and that's it, or what?
Lewis: Well, it's not really an issue of user growth. That's been fine. I think it's more that, there was kind of this expected floor at a certain level. Maybe it was somewhere in the low 30's for growth. And, given that they are not consistently net income positive, people kind of thought, "Alright, we're going to continue to see this growth, and that will fuel all of the stock price growth, and all the valuation built into the stock at the moment."
O'Reilly: Should we read these numbers off to the listeners?
O'Reilly: Go ahead.
Lewis: So, I mean, it's not a totally fair comparison, because the businesses are a little bit different. But --
O'Reilly: And it's addictive -- we're going to compare them to Facebook anyways!
Lewis: It's hard not to talk about Facebook when you talk about LinkedIn, right? So, just for context on what kind of growth rates they've been experiencing: 2013, 54% year over year. 2014, 58%. 2015, 44%. 2016, they're estimating between 30-40%. So, they're also seeing a decline, if you look at the last three years. It is not quite as steep, and there's still a lot more upside. Obviously, the model's a lot different, and it's much more scalable, because they're just serving up ads. But that might also have added to some of the pessimism a little bit.
Lewis: If you look at what is underlying these revised growth rates and why LinkedIn thinks they might be not growing as quickly as they have historically, they're saying that Talent Solutions business segment could decline from roughly 30% growth in 2015 to mid-20% growth. And this is largely related to macro-factors. They cited weakness in Europe, the Middle East, Africa, as well as some of the Asia-Pacific countries, and I think they're at roughly 40% of their business outside of the U.S., and I think that's where a lot of their growth is coming from. And so, a lot of the economic slowdown that we're seeing in some of those --
O'Reilly: Abroad, yeah.
Lewis: -- major countries abroad, is going to be problematic for them.
Dylan Lewis has no position in any stocks mentioned. Sean O'Reilly has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook and LinkedIn. Try any of our Foolish newsletter services free for 30 days. 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.