LinkedIn (NYSE: LNKD) shares have fallen about 25% in the last month after they reported Q1 results on April 30. If you are an investor who is looking to sell the stock, take a deep breath, and read this post. The thing is that LinkedIn's first quarter results were actually solid. The company's revenue was $638 million and EPS was $0.57 which was in line with what Wall Street was expecting if not slightly better. How is it then that the share price dropped? The answer is that LinkedIn lowered the guidance for the rest of the year. Earlier they expected revenue of $2.93 - $2.95 billion and EPS of $2.95 for 2015. Their new guidance figures for this year was a revenue of $2.9 billion and EPS of $1.90. As you can see, the big change was that earnings per share fell from $2.95 to $1.90. The company's management said that the main reason for the reduced EPS outlook was their acquisition of lynda.com, a leading online learning company.
I think this acquisition makes total sense for LinkedIn.
I think this acquisition makes total sense for LinkedIn. This became LinkedIn's biggest acquisition so far, they bought Lynda.com for $1.5 billion. Lynda.com was founded in 1995 and has grown to become a leading online learning company that provides more than 5,700 classes and 255,000 video tutorials. Integrating online courses on LinkedIn's platform is a natural development and will pay off big in the future. Analysts estimate the corporate training market to become a $130 billion industry and the content market to be a $20 billion industry. This acquisition will help LinkedIn improve user engagement and will also enable them to provide skills their users needs for jobs. As LinkedIn says, "Now we can help people in a city locate jobs and opportunities, identify their gaps in skills, directly learn those skills through Lynda.com, and compete for and get these new jobs."
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The question is whether the market has overreacted or if the decline is justified because of the weaker guidance? LinkedIn says that the costs associated with the acquisition will affect the company's profitability in the near-term. This should be understandable among all investors that the integration of lynda.com will cost some money and will pay off in the long run. One more thing that contributed to the weak guidance is something that has affected several US companies operating abroad, namely a strong dollar. It's always difficult to predict the currency impact into analyst projections. However, the market is obviously worried about the lower profitability as LinkedIn expects this year but I think there has been an overreaction. I'm a long-term investor in LinkedIn and will not leave this boat. With tech stocks, you can expect high waves but you must remember, you're in a speedboat. The long-term story for LinkedIn has not changed, it remains the same.
The long-term story for LinkedIn has not changed, it remains the same.
LinkedIn has a stable revenue model, with low marketing, unlike other social networks. Their revenue is diversified between their three primary business units: Premium Subscriptions, Marketing and Talent Solutions. Most of LinkedIn's revenue comes from their Talent Solutions, which accounts for 62% of total revenue. Premium Subscriptions segment represents 19% of their revenues and Marketing Solutions likewise 19%. Their revenues are well-diversified and marketing does not constitute a major part which means that they have a solid business model. Further, all three of LinkedIn's business segments are growing at a steady pace. Premium Subscriptions, Marketing Solutions and Talent Solutions reported year-over-year revenue growth of 28%, 38% and 36% in Q1.
Additionally is member engagement still rising rapidly, as you can see in the picture above. LinkedIn now has 364 million users, an increase of 23% compared to the year before. Unique visiting members during the first quarter was 97 million, this is an increase of 18% compared to last year. And member page views increased by over 30% during the year to 34 million. These figures are the foundation of LinkedIn's business and as you see, they continue to grow at a high rate. Despite the market panic sell-off, LinkedIn still looks like a good investment for long-term. I have previously written a post where I more fully describes LinkedIn's business and why LinkedIn is a good long-term investment, you can read it here: Is LinkedIn A Good Investment?
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