Despite strong growth on the top-line as well as the bottom-line, professional networking site LinkedIn Corp (NYSE:LNKD) saw its stock plummet. A large portion of the company’s expected growth was already factored into the share price.
Management’s weak guidance for Q2 2013 along with concerns about the firm’s ability to earn revenue from advertising sparked the sell-off. However, LinkedIn can gain a much stronger foothold in the online recruitment solutions business in the future.
Solid numbers
According to comScore, LinkedIn and its Slideshare segment now have 170 million-plus monthly unique visitors, and the company now ranks as the 22nd most visited web property in the world. Total revenue grew to $325 million, up 72% on a year-over-year basis.
In addition, LinkedIn Corp (NYSE:LNKD) has finally managed to portray its ability to earn a decent profit. The company’s net profit for Q1 2013 stood at around $23 million, up from the $5 million the company earned in Q1 2012. The company has a strong balance sheet with $830 million in cash and securities, and generated operating cash flow of more than $103 million during the period.
Recruiting is still the key driver
LinkedIn’s fortunes are still largely driven by the company’s talent solutions business, which makes up 57% of the company’s total revenue. And that segment’s revenue grew to $184 million in Q1 2013, which represents a staggering 80% year-over-year growth. From the numbers alone, it is quite evident that LinkedIn Corp (NYSE:LNKD) is slowly becoming the major outlet for firms for fulfilling their recruiting needs. LinkedIn has introduced newer formats of it leading talent solutions product, Recruiter, to gain more customers.
And LinkedIn’s CFO has stated that he expects the company’s talent solutions to gain more momentum going forward. LinkedIn will be able to snatch more corporate customers away from other competitors in the space, including Monster Worldwide, Inc. (NYSE:MWW) and Gannett Co., Inc. (NYSE:GCI)’s CareerBuilder.
Monster has been struggling in the space, the company has been rapidly cutting head-count and Monster’s revenue in Q1 2013 fell 9% from a year ago. Monster Worldwide, Inc. (NYSE:MWW)’s already depressed share price got a boost after the company initiated a share buyback program, and is actively pursuing strategic alternatives including an outright sale.
LinkedIn Corp (NYSE:LNKD)’s revenue from premium subscriptions stood at $66 million, and is unlikely to be the lion’s share of the company’s total sales in the future. Individuals, other than business development and marketing professionals, are rather reluctant to pay monthly fees for more premium services. LinkedIn’s deferred revenue seems to be growing, as it represents how much revenue the company will earn in the future periods.
As most of the talent and marketing solutions business of LinkedIn include deliverables to the client that span over multiple periods, it is a good gauge of the company’s expected revenue growth. Deferred revenue rose to $317 million in Q1 2013 from $257 million at the end of 2012, and the company also added more than 1,700 new corporate customers. In addition, LinkedIn Corp (NYSE:LNKD) is increasing the price of some of its products in Q2, which might impact the churn of the company’s clients in the latter half.
Advertising can get better
A rather disappointing portion of LinkedIn’s earnings report was the company’s low revenue from the advertising business, which made up 23% of total sales. LinkedIn Corp (NYSE:LNKD)’s ad revenue business grew 56% year-over-year, coming in at $75 million. LinkedIn’s revenue generation ability from advertising as a social media company hasn’t achieved full potential.
On a comparative basis, the leading social networking company, Facebook Inc (NASDAQ:FB), generated roughly $1.25 billion from ad revenue alone in the last quarter. Although LinkedIn’s subscriber base is only a fraction of Facebook Inc (NASDAQ:FB)’s 1.1 billion active user base, it’s safe to say that LinkedIn Corp (NYSE:LNKD)’s advertising business hasn’t gotten off the ground yet.
Other social media companies of comparable size, like Twitter, are poised to earn a lot from advertising. However, the company has taken steps to address this by displaying sponsored updates from various corporate customers.
Engagement and mobile
LinkedIn Corp (NYSE:LNKD) continues to add more new innovative products to engage users in its platform. LinkedIn has introduced enhanced search capabilities, signing up more influencers to publish content, as well as newer versions of iOS and Android mobile apps which increased likes and comments per unique user by 40%.
To fast track is mobile presence, LinkedIn acquired Pulse, which is a leading news reader on the mobile and content distribution platform. Pulse’s apps have seen in excess of 30 million activations, and should pave the way for more innovation and user engagement on mobile devices. LinkedIn has seen a slight increase in unique visitors on mobile, which stood at 30% up from the 19% a year ago.
Most importantly for LinkedIn Corp (NYSE:LNKD), the company’s cumulative page views hit a record 11.6 billion in the quarter, a solid jump from the Q4 2012 total page views of 9.8 billion. Heightened levels of user engagement will enable the company to earn more dollars at least from display advertising and content marketing feeds.
The bottom line
The recent sell-off in the company’s shares was a function of the management’s guidance not living up to the expectations of the sell-side. In addition, the company plans to invest heavily in certain areas of its business, which might impact operating margins in the near-term. It might not be a good idea to buy LinkedIn Corp (NYSE:LNKD) stock at current high valuations, at least until the company portrays some strong signs of advertising revenue growth.
The article Should You Buy This Stock After Its Recent Drop? originally appeared on Fool.com and is written by Ishfaque Faruk.
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