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1 Analyst Disagrees With the LinkedIn Bull Thesis

By Andrew Tonner – Mar 23, 2016 at 3:48PM

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Morgan Stanley voiced important concerns with its recent downgrade of LinkedIn stock. However, its analysis only tells part of the story for the world's largest professional social network.

Source: LinkedIn

The claim that "2016 has been a difficult year for LinkedIn (Nasdaq: LNKD)" could compete for understatement of the year, especially among tech investors.

Largely driven by its disappointing first quarter earnings announcement, shares of the world's foremost professional social network are trading deeply in negative territory as we turn the corner to spring.

Now the company will need more than April showers to thaw its icy rapport with the analyst community, as a recent downgrade from research power Morgan Stanley helps illustrate.

Morgan Stanley disses LinkedIn
In a note to its clients last week, Morgan Stanley took LinkedIn to task, downgrading the company's shares from overweight to equal weight, the equivalent of lowering from a buy to a hold rating. What's more, Morgan Stanley also sharply reduced its 12-month price target for LinkedIn stock from $190 to $125.

Morgan Stanley's longtime bullishness on LinkedIn largely boiled down to 2 core growth drivers. First, Morgan Stanley believed the company would enjoy substantial long-term growth from its Talent Solutions segment as large and medium sized companies turned to LinkedIn to help further streamline their recruiting efforts. Second, the research firm expected areas like business-to business advertising, its career education platform, and its Sales Navigator products to each evolve into their own appreciable revenue streams as well. However, per its research report, "4Q:15 results, 2016 guidance, decelerating large enterprise customer growth, and recent management commentary on strategic investments make us believe we have overestimated LNKD's ability to grow its platform and underestimated the investment needed to grow."

Owing to both these factors, Morgan Stanley lowered its near-term and long-term growth expectations, saying the company now believes that LinkedIn's overall opportunity as the leading professional networking platform is now far smaller than previously estimated. LinkedIn's shares fell about 5% on the news, understandable given the extent of its price target reductions.

However, if you compare some of Morgan Stanley's thinking to LinkedIn's long-term opportunity at its newly lowered trading levels, this downgrade only tells part of the story for tech investors considering LinkedIn.

Source: LinkedIn

Only half true
On the surface, Morgan Stanley's thoughts contain mostly negative news for LinkedIn. And while it was well short of a glowing review, the research report by itself only tells half the story.

For starters, the generally positive direction of LinkedIn's product development efforts suggest that improvements to the company's growth might be around the corner. In the past year, LinkedIn unveiled meaningful improvements across nearly every segment of its business. The firm launched an updated edition of its Recruiter product, overhauled its mobile app, shifted its content monetization strategy to double-down on Sponsored Updates, and more. What's more, its three main revenue segments -- Talent Solutions, Marketing Solutions, and Premium Subscriptions -- grew their revenue 41%, 28%, and 22% respectively for the full-year 2015. That's admittedly slower than in the past, but those aren't the growth rates of a business with fading momentum.

Its also worth noting that Morgan Stanley's $125 price target for LinkedIn shares still sits about 10% above LinkedIn's current trading range as of Monday morning. What's more, Morgan Stanley's new price target sits well below the average analyst estimate of $173. Viewed this way, Morgan Stanley's lowering its price target reflects a resetting of expectations from extremely bullish to moderately positive on the part of Morgan Stanley's sell-side analyst team, and it doesn't necessarily reflect the thinking of the wider analyst community. To be sure, any downgrade of a company's stock can sting, especially coming from a well-known sell-side firm like Morgan Stanley. However, investors should always dig deeper than just the headline figures.

Andrew Tonner 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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