Shares of LinkedIn (LNKD) are setting fresh highs after the company released a strong set of second quarter results.
Investors are satisfied with the beat for the second quarter, the solid guidance and new developments at the company. These indicate that LinkedIn was successful in the transition towards greater mobile adoption and is able to monetize on those traffic streams as well.
While the current valuation is sky high, like it has been over the past two years, shares are no obvious short. Although a meaningful correction could always occur, especially if the current sentiment would turn around, the very long-term potential remains.
Second Quarter Results
LinkedIn generated second quarter revenues of $363.7 million, up 59% on the year before, and ahead of consensus estimates of $354.3 million.
Adjusted EBITDA came in at $88.6 million, up from $50.4 million. Consequently, EBITDA margins rose by 2 percent to 24% of total revenues.
Non-GAAP earnings rose by 146% towards $44.5 million. Net income, which includes stock based compensation and amortization of intangible assets, rose much more modestly to a paltry $3.7 million.
Non-GAAP earnings came in at $0.38 per quarter, while GAAP earnings came in at $0.03 per share.
Looking Into The Results
LinkedIn continues to see rapid growth across all business activities. The membership base rose by 37% towards 238 million. However users have started to use the network more intensively with the introduction of professional luminaries and new iOS and Android apps. Average revenue per member rose to $1.53 during the quarter.
Talent solutions generated $205.1 million in revenues, up 69% on the year. Besides increased usage from recruiters all over the world, members are also increasing the usage of premium subscriptions. Those revenues rose by 68% toward $73.0 million as more and more professionals see the benefit of the features being offered.
Marketing solutions rose by merely 36% to $85.6 million, thereby lagging growth at the other divisions.
The company saw rapid growth across the globe, and those growth rates have been quite comparable. International revenues now make up 38% of total revenues.
... And The Rest Of The Year
Based on the strong results, LinkedIn is confident for the rest of the year. Third quarter revenues are expected to come in between $367 and $373 million. At the midpoint of the guidance, revenue growth will accelerate toward 62% compared to a year ago, although it will increase by merely 2% on the quarter. This came a bit short of consensus estimates of $383 million.
Adjusted EBITDA is expected to fall compared to the second quarter, toward $81-$83 million. The company is likely to post a net loss on the back of amortization charges and stock-based compensation.
Full year revenues are expected to come in between $1.455 and $1.475 billion. The company might be able to squeeze out a tiny profit on GAAP metrics.
LinkedIn ended the second quarter with $873.4 million in cash, equivalents and short term investments. The company operates without the assumption of debt for a solid net cash position.
Factoring in the 10% jump following the earnings release, with shares exchanging hands around $235 per share, the market values LinkedIn at $26 billion, or its operating assets just north of $25 billion.
This values operating assets of the firm at around 17 times annual revenues and a non-meaningful earnings multiple.
Some Historical Perspective
LinkedIn has been a success story after it had gone public in May of 2011, just over two years ago.
Shares were sold to the public at $45 per share, but already doubled on their opening day. Following the great success, shares have been trading around the $100 mark for the remainder of 2011 and 2012. Since the start of 2013, shares have more than doubled to current levels around $235 per share.
Between 2009 and 2013, LinkedIn is on track to more than ten-fold its annual revenues toward $1.5 billion. The company has reported modest profits in recent years as it invests heavily into the future.
LinkedIn continues to be on the right track as second quarter revenues comfortably exceeded its own outlook and analysts estimates. While the guidance for the third quarter fell short of estimates, LinkedIn has built a reputation to beat its own guidance. This is the likely reason why investors are not uncomfortable with the current outlook.
Instead, trends continue to look healthy. New mobile apps continue to gain traction, at the same time when related firms like Facebook (FB) have started to see the first real signs of success of mobile advertising.
LinkedIn sees its addressable market across the globe to be around 600 million knowledge workers, of which it has captured some 40%. Besides increasing the adoption of its network in that market, the company is boosting engagement on the network and page views on its site, thereby boosting advertising revenues and relevance online. New blogs by well known people are a great success and the company is confident that sponsored corporate adds will be successful as well.
Still, most money is made from recruiters which find the website extremely useful and continue to increase adoption despite recent price increases. Many corporate professionals find the monthly fees money well spent as well to boost their appearances in search results and chances to get a good job.
Back in May of this year, when LinkedIn reported its first quarter results, I took a look at the company's prospects. At the time shares were trading around $175 per share and have risen about a third from that point in time.
I have to reiterate my conclusion from that time. Discussions about stratospheric price-earnings ratios for a firm like LinkedIn are irrelevant as the company does not aim to generate short-term profits. More important is to grow the network to remain "meaningful" in today's rapid changing technological world.
As a result, the "current" valuation of LinkedIn is sky-high, but so has it been in the past. Yet shares have more than five-folded from their public offering levels in little over two years time. Instead of focusing on current earnings, investors should focus on membership growth and average revenues per user, both of which should continue to drive revenue growth, boosted by the latest initiatives.
At this rate revenues of $4 to $5 billion should be attainable in 2015, especially as LinkedIn can accelerate ARPU growth as membership growth will slow down. As such a meaningful 20-30% correction in the shares always remains among the possibilities, but the greatest risk of all could be to initiate an outright short position.