LinkedIn Corp (NYSE:LNKD) provides an integrated social network that meets the needs of business professionals and employers. Its stock returns have been nothing short of extraordinary over the last 16 months. If someone had invested in the stock in late November 2011, he would have had a 100% return by September 2012 and a 200% return by March 2013.
The reason behind this stock price movement has been the company’s phenomenal financial performance in the last two quarters, which surpassed every analyst’s forecast by a huge margin. Before the release of the last quarterly results, analysts expected EPS of $0.19 per share and revenues of $279.93 million. But the company reported EPS of $0.35 per share and revenues of $303.6 million, surpassing all these estimates.
The company quadrupled its revenue in two years, as the number was $243 million in 2010 and $972 million in 2011. Analysts have always underestimated the revenue generation capacity of the company, and therefore better financial performance as compared to the expectations leads to the stock soaring high.
Overvalued Stock?
The company has a P/E ratio of more than 1,000, which is way higher than even the closest peer in the industry, while the industry average is 28.2. Its P/S ratio is also lower than the industry average. These two ratios suggest that the company is currently overvalued in comparison to its fundamentals and a correction is probable in the short to middle term. However, the EPS growth forecast for the next five years at 61.33% signals that the correction might not be too much. This is also because of the company’s strong balance sheet, zero leverage and robust operating cash flow.
What Will Drive Further Revenue Growth?
The rise in the stock price has come off of exceptional revenue and profit margins. But this growth is not sustainable for a very long time, unless the company keeps innovating like it did when it released a new look for its homepage. This innovation led to a 70% increase in page views since its launch, as it enabled members to discover, share and discuss the professional information that is most relevant to them. In its Q4 conference call, the management discussed all the new features introduced during the last six months. These included a new homepage, integration of LinkedIn Corp (NYSE:LNKD) Today into the homepage, a new version of LinkedIn profile etc. This innovations has been playing a very significant part in revenue generation for the company and therefore have to be continued in order to sustain the advantage for a longer period of time.
Also, acquisitions of rapidly growing companies have to be made to grow its revenues inorganically as well. One of those acquisitions was Slideshare, which experienced huge traffic, reaching over 47 million unique users in Q4, representing a 68% increase over the same quarter last year. Yesterday, the company acquired Pulse, a leading news reader and mobile content distribution platform, at approximately $90 million. The application currently has about 30 million users in more than 190 countries. This will further help the company in its vision to deliver value to its members and become the definitive professional publishing platform.
International growth is also essential for the company. It reported a 38% share of international revenues in total revenues as compared to 33% last year. It is rapidly expanding around the world and is now available physically as well in many countries.
Competitors
Facebook Inc (NASDAQ:FB) stock has been very volatile since its IPO. From its offer price near $40, the stock once fell to a low of around $17 in September 2012 and is now trading around $28. It recently launched its Social Jobs application, which is believed to be in direct competition with LinkedIn Corp (NYSE:LNKD). It is an aggregated search tool that lets users search job postings among five of Facebook Inc (NASDAQ:FB)’s application partners – Monster Worldwide, Inc. (NYSE:MWW), BranchOut, Work4Labs, US.jobs and Jobvite. Though the initial reviews of the application haven’t been great, with Facebook Inc (NASDAQ:FB) one can never tell what’s in store.
Monster Worldwide, Inc. (NYSE:MWW) is trading at a forward P/E ratio of 10.69, much lower than LinkedIn Corp (NYSE:LNKD). The stock hasn’t been performing well over the last 14 months and has dropped more than 80% since January 2011. Though the P/E ratio suggests that the stock is undervalued, its negative EPS growth rate forecast for the next five years will limit the upside.
Outlook
The company’s efforts to continuously innovate and release new products and features for its users, grow inorganically by acquiring rapidly growing young companies, and expand internationally will drive the company’s growth in the next few quarters.
But the company has to keep beating market estimates in order for the stock to keep following an upward trend. After the company’s performance in the last two quarters, even a moderate financial quarter in line with estimates might lead to a fall. Since this is not sustainable for a long period of time, the stock has to correct itself in the future. Though further upside movement is still possible, an entry into the stock at this moment is not suggested. Risk-averse investors should absolutely not invest until it reaches at least $161.
The article Play the Waiting Game originally appeared on Fool.com is written by Sujata Dutta.
