LinkedIn Corp (NYSE:LNKD) has firmly established its presence as the most notable professional platform in the social media space. The company has been growing rapidly in most of the key areas. However, the company’s rich valuation and the increasingly crowded social media landscape warrant a look at some of the things that can go wrong with an investment in LinkedIn Corp (NYSE:LNKD). Here are five reasons to stay away from LinkedIn’s stock:
1. Declining user engagement
LinkedIn has a done a great job of signing up more than 225 million registered users. According to comScore, LinkedIn and the publishing segment, Slideshare, have a combined monthly user-base of 170 million users. However, the time spent on LinkedIn is not rising dramatically. In other words, visitors to LinkedIn Corp (NYSE:LNKD) are not actively engaging and communicating with other users. Numerous members of the site are quite inactive in LinkedIn’s platform, very much in line with Google Inc (NASDAQ:GOOG)‘s social media arm, Google+.
As LinkedIn is a professional network, users don’t visit the site for months. Average page view per member now stands at 53, well below its all-time high of 70 back in Q1-2011. Social media rival Facebook Inc (NASDAQ:FB)has been rapidly converting its monthly active users to daily active users, which hit all-time highs. In Q1-2013, Facebook Inc (NASDAQ:FB) reported that 60% of its monthly active user base visits its platform every day, which translates into a daily user base of more than 665 million.
The rapidly rising number of social media alternatives for Internet users will likely impact a handful of relatively weaker platforms like LinkedIn Corp (NYSE:LNKD) and Google+. Many users are shifting towards newer ones like Tumblr, Pinterest, Instagram and Twitter. The increasing number of social platforms is also leading tosocial media fatigue.
2. High Multiples
A majority of the company’s future upside is already baked into its stock price. In the last quarter, the company’s management provided relatively weak guidance, which led to a steep decline in the share price of the company. The company is trading at very high earnings multiples under any scenario. LinkedIn’s valuation is rich as measured by its trailing twelve month P/E of 701 and a forward P/E of roughly 86.
On a comparative basis, other leading Internet names like Facebook Inc (NASDAQ:FB) and Google Inc (NASDAQ:GOOG) have much more reasonable valuations. Facebook is trading at an earnings multiple of roughly 528 and has a forward P/E of 32. Whereas, Google Inc (NASDAQ:GOOG) is trading at 27x current earnings and has a reasonable forward P/E of 17. LinkedIn Corp (NYSE:LNKD) is quite an expensive stock, and it is already priced for perfection.
3. Growth rates will decelerate
LinkedIn has seen explosive growth rates in almost all of its business segments.LinkedIn Corp (NYSE:LNKD)’s revenue has been growing at high double growth rates for a number of quarters, but that was largely attributable to its small size. As the company gets bigger, its growth rates will trickle down substantially.
The company makes more than 57% of its total revenues from the talent solutions business, and this market segment is not a very big one. It has already taken a lot of market share from other recruiting portals like Monster and Careerbuilder. As a result, the amount of future growth in its primary revenue segment is largely questionable.
In addition, the company’s registered user base of 225 million professional members globally is already a lot. The company has pointed to an addressable market of roughly 600 million professionals across the globe, but a large number of those users are already on board. In a nutshell, future growth in users will likely be a lot slower than the historical levels of 50-70%.
