While LinkedIn Corp (NYSE:LNKD) reported results that beat on the top and bottom line, the stock tanked on a disappointing outlook. This may provide an enticing entry point for those that are bullish on the stock.
Stock overview
LinkedIn Corp (NYSE:LNKD) operates the world’s largest online professional network, counting over 255 million users, providing members with a social platform to manage their professional identity on the web. It allows people to join professional networks, search for jobs, and find business opportunities.
The company has a market cap of $19.15 billion and a fairly volatile 1.89 beta. It’s up nearly 60% over the last twelve months, and has been a favorite for shorts in the past due to its enormous valuation.
Strong earnings, weak outlook
The company’s latest earnings report was a mixed bag for investors, as the company beat estimates but lowered its outlook. Revenue came in at $324.7 million, topping analyst estimates of $317.1 million. This figure was up a massive 72% year-on-year, showing that the company is capable of delivering impressive top line growth. The firm reported EPS of $0.45, which also beat the $0.31 consensus estimate easily, and was up from $0.15 in Q1 2012.
On the face of it, the report wasn’t bad at all, with record levels of revenue, profitability, and cash flow according to management. Revenue from Talent Solutions products grew especially fast, with an 80% increase. Revenue from Premium Subscription services increased 73%, representing some 20% of total revenue. Management reaffirmed its commitment to its operating priorities, diversifying the business, and investing aggressively in order to sustain growth, introducing a new version of search and developing its mobile business.
Like Facebook Inc (NASDAQ:FB), LinkedIn Corp (NYSE:LNKD) is increasingly trying to profit from mobile advertising, and saw fairly good growth in mobile use with 30% of unique visitors visiting the mobile app versus 19% a year ago. However, it still has a great deal of room to grow in this arena, earning only $258 million from ads last year.
However, the outlook substantially missed Street estimates, which is what caused the dramatic 13% sell-off on Friday. Versus a consensus estimate of $359.2 million in revenue for Q2, the company is now expecting revenues of between $342 million and $347 million. Full-year sales are expected to be between $1.43 billion and 1.46 billion, also coming in under the consensus. Yet, the company is still maintaining strong growth, and for those that are bullish on the stock, the drop may provide a perfect opportunity to get in.
Competition
Social networking giant Facebook Inc (NASDAQ:FB) saw its stock rise last week on stronger than expected revenue, with first-quarter sales up 38% to $1.46 billion beating analyst estimates. Investors were especially pleased with the company’s mobile performance, with mobile now accounting for some 30% of advertising revenue versus 23% in the previous period. The number of mobile users grew 54% to 751 million, further bolstering investor confidence.
A prime online employment competitor, Monster Worldwide, Inc. (NYSE:MWW), has been struggling to get earnings back to pre-crisis levels of around $1.43 in 2007. Annual EPS has more or less flat-lined since 2011, staying around $0.37 per share. For Q1 2013, the company reported a drop in revenue of some $22 million, citing a tough global economy. As a result, the company has announced a strategic review of its business, and is looking for ways to streamline its organization.
Valuations and metrics
I am personally wary of the valuations in the social networking space, although many investors seem undeterred by these formidable numbers. LinkedIn Corp (NYSE:LNKD) currently trades at nearly 1,250 times trailing earnings, and Facebook Inc (NASDAQ:FB) is also up there with about 580 times trailing earnings. LinkedIn Corp (NYSE:LNKD) has an operating margin of 6%, which is under the industry average, and a return on equity of less than 3%. On the other hand, they have a fair amount of cash with zero debt.
The bottom line
While LinkedIn Corp (NYSE:LNKD) delivered strong earnings and revenue growth, the stock got slammed on a weak outlook. Despite this drop, the stock is still trading a huge metric, which deters me personally from getting in. However, there are many investors who are bullish on the stock and the industry, and the drop in stock price may be an interesting opportunity for those are looking to go long on this professional networking giant.
The article This Company’s Disappointing Outlook Is an Opportunity originally appeared on Fool.com.
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