LinkedIn Stock Tumbles

After delivering some strong quarterly results, LinkedIn (NYSE: LNKD) seems to be struggling in growing their core business. While overall results and projections were better than expectations, the market was not so happy considering that a bulk of that improvement is attributed to LinkedIn’s earlier acquisition of Lynda.com. Post announcement of the results, the stock fell 10%. I still believe that LinkedIn is one of the smartest companies around today and I am confident their moves will prove the same in time.

LinkedIn’s Financials

LinkedIn’s second quarter revenues grew 33% over the year to $711.7 million, ahead of the Street’s forecast of $680 million. EPS of $0.55 was also significantly ahead of the market’s forecast of $0.30 for the quarter.

By segment, revenues from their Talent Solutions segment, which includes Lynda.com’s Learning & Development section, grew 38% to $443 million. Marketing Solutions revenue grew 32% to $140 million and Premium Subscriptions revenue increased 22% to $128 million.

Among operating metrics, LinkedIn’s cumulative members grew 21% to 380 million and unique visiting members improved 16% to 97 million per month while overall member page views grew 37%. Mobile continues to show strong growth and accounted for 52% of overall traffic to their site.

For the current quarter, LinkedIn projected revenues at $745 million-$750 million with an EPS of $0.43. The Street was projecting revenues of $744.7 million and an EPS of $0.42. LinkedIn expects to end the year with revenues of $2.94 billion with an EPS of $2.19 per share, again, ahead of the Street’s forecast of $2.91 billion and $1.93 per share.

LinkedIn’s Worries

While LinkedIn’s revenue forecasts are better than market expectations, it is no secret that the upside is being driven by Lynda.com’s contributions. LinkedIn revised their revenue forecast upwards for the year by $40 million of which nearly $34 million is expected to come from Lynda. Analysts thus believe that LinkedIn’s business revenue growth appears to be slowing down. LinkedIn has been transitioning away from the higher priced premium display ads to more performance-based ads as those are the preferred advertisements on a mobile device. During the quarter, display ad business revenues fell 30% over the year compared with a 10% decline reported a quarter ago.

The Street is also worried about LinkedIn’s rising costs. Of late, the company has been expanding their sales force and investing heavily in R&D head count. During the current quarter, expenses grew 53% over the year to $792.9 million.

Finally, LinkedIn also appears to be struggling with growing their unique user base. Their monthly unique user base may have grown 16% over the year, but it was flat sequentially at 97 million members.

Their stock is trading at $192.70 with a market capitalization of $24.27 billion. It touched a 52-week high of $276.18 in February this year and 52-week low of $187.61 in October last year.

My Read

LinkedIn, with the Lynda.com acquisition, has entered the business of educational content with a subscription fee business model. This move, it appears, is turning out to be a success. Once it is fully penetrated into the LinkedIn user base, the offering should be able to generate many quarters of sustained growth. I don’t see this as a problem. In fact, LinkedIn can add to this business by acquiring other types of educational content. For the foreseeable future, the educational content subscription business should deliver good growth.

Besides, 380 million users is a very large user base, and a very small portion of that is monetized at this point through subscription revenue to their premium program. They need to figure out how to improve conversion rates in that business with a more active focus on the offering. Marketing Solutions also has immense potential, but hasn’t been adequately leveraged yet.