Expectations Realigned for LinkedIn

After years of sky-high valuations, the year 2016 has gotten off to a gloomy start for the Tech market. Against this gloomy backdrop, LinkedIn’s disappointing outlook was punished harshly with its stock plunging more than 40%, wiping off $11 billion of its market value. It has also triggered a reassessment of the overhyped potential of Internet and cloud stocks.

LinkedIn’s Financials

Fourth quarter revenue grew 34% to $862 million. Non-GAAP net income was $126 million or EPS of $0.94 versus $0.61 cents last year, beating analyst estimates of earnings of $0.78 per share on revenue of $858 million.

Full year 2015 revenue grew 35% to $2.991 billion. GAAP net loss was $166 million. Non-GAAP net income was $373 million.

By segment, Marketing Solutions revenue grew 20% in Q4 to $183 million. Premium Subscriptions revenue grew 19% to $144 million driven by its fast-growing Sales Solution. Talent Solutions revenue grew 45% to $535 million.

Included in Talent Solutions segment is Lynda.com’s Learning & Development section, which contributed $49 million while hiring accounted for $487 million to the segment.

During the quarter, cumulative members grew 19% to 414 million, unique visiting members grew 7% to an average of 100 million per month, and member page views grew 26%. Mobile grew 3x faster than overall member activity, and now represents 57% of all traffic to LinkedIn.

It launched its Flagship app in December, which it claims has doubled the incidence of members sharing content. It adds that both Flagship and Job Seeker apps have helped increase relevance and an 80% growth in jobs engagement, up from 30% growth a year ago. Its jobs app has seen traffic increase approximately 6x from a year ago.

For the first quarter, LinkedIn expects revenue of about $820 million or 29% growth and non-GAAP EPS of about $0.55. Analysts had on average projected about $868.3 million in revenue and earnings of $0.75 per share.

For 2016, it expects revenue of $3.6 billion-$3.65 billion, below Street consensus of $3.91 billion. This translates to a growth range of 20% to 22%, a marked slowdown from the 35% growth seen last year.

LinkedIn’s Acquisitions

LinkedIn also announced in its earnings that it has acquired Connectifier to leverage its machine learning-based searching and matching technology to help recruiters and hiring managers find the perfect talent fit. Connectifier’s customers include Dropbox, eBay, Facebook, Netflix, Twitter, and VMware and it had raised $6 million in funding last year. Terms of the deal were not disclosed.

LinkedIn also announced that it will be phasing out Lead Accelerator as a standalone offering and will be incorporated into Sponsored Content. Although it will cost LinkedIn about $50 million in potential revenue, it hopes this move will strengthen its Sponsored Content experience.

What went wrong?

Clearly, LinkedIn had a reasonably good quarter that exceeded expectations and which would normally have sent the stock soaring. It has healthy fundamentals and a good strategy in place. It has been making sensible acquisitions like Lynda.com and Connectifier that would complement its core business value proposition in adjacent markets.

Regarding the conservative outlook, Dan Gallagher on Wall Street Journal says,

“A portion of that can be chalked up to adverse currency effects and caution about a slowing global economy. But the company is also conservative with its projections, and has beaten the high end of its revenue forecasts for at least the past eight quarters.”

Part of it is also due to its decision to phase out Lead Accelerator. But I think most of this carnage is due to the huge expectations that have been running up the stocks. There is a lot of undue emphasis on meeting these unrealistic forecasts every quarter. LinkedIn is an excellent company that should do well in the long-term. Investors and analysts should be patient and realign their expectations.

Following the results, four analysts have downgraded the stock to Neutral and one to Sector Perform. It hit a 52-week low of $102.81 following the results. Yesterday, it hit a new low of $100.12 and its market cap is $13.24 billion. It hit its 52-week high of $276.18 a year ago.