Just like the vast majority of technology, social networking, cloud and "momentum" stocks, LinkedIn (NYSE:LNKD) has not been able to avoid the moods of Mr. Market so far this year.
Concerns about runaway momentum, too high valuations, growth and the Federal Reserve's tapering moves has triggered a sell-off in recent months. While LinkedIn's valuation is very high based on traditional valuation metrics, perhaps the recent sell-off might provide a nice entry opportunity to set up a relative value play.
Value Proposition - LinkedIn's Business Model
LinkedIn's business model is based upon three main pillars. The network allows working professionals to create a professional identity. These professionals have the opportunity to connect to each other on the network exchanging knowledge and finding job and networking opportunities.
The platform allows professionals, human resources staff and head hunters to hire, marketer and sell their opportunities.
First Quarter Results
LinkedIn reported solid first quarter results with revenues increasing by 46% to $473.2 million. Revenues came in ahead of consensus estimates at $467 million. As the company celebrated crossing the 300 million member mark about two weeks ago, this implies that average revenue per user (ARPU) came in at roughly $1.58 for the quarter.
The company reported a GAAP loss of $13.4 million compared to net earnings of $22.6 million in the same period last year. Note that LinkedIn took a very small provision for income taxes last year while these costs rose to $13.6 million over the past quarter.
Non-GAAP earnings, which exclude stock-based compensation, came in at $0.38 per share. This was actually down by seven cents compared to last year, but came in ahead of consensus estimates at $0.34 per share.
Revenue growth was seen in all three main divisions. Talent solutions revenues rose by 50% to $275.9 million. Premium member subscription revenues rose by 46% to $95.5 million while marketing solutions revenue were up by 36% to $101.8 million.
Traditionally, LinkedIn is very cautious in its guidance only to exceed its own guidance a few months later. Second quarter revenues are seen between $500 and $505 million while analysts were looking for a number at the high end of that range.
Full year revenues are now seen between $2.06 and $2.08 billion, thereby coming in below the consensus estimates of $2.11 billion.
A Perspective On Value
Trading around $150 per share, the valuation of LinkedIn currently stands at $18 billion. Excluding the net cash position of $2.3 billion, operating assets are valued at $15.7 billion. This comes down to a valuation of roughly 7-8 times annual revenues and values the network at roughly $52 per user.
On traditional valuation metrics, these are of course insane valuations, especially given the fact that the company is still reporting losses.
Compared to the usual suspects like Twitter (NYSE:TWTR) and Facebook (NASDAQ:FB), LinkedIn actually shows up relatively favorable. With little over 300 million users, it has more users than Twitter's 255 million, while obviously still trailing Facebook's 1.28 billion users.
What is interesting to note is the ARPU reported by LinkedIn at $1.58 per user for the quarter. This trails the ARPU of $1.77 as reported by Facebook by a little bit, but comes in way ahead of Twitter's $0.98.
The most interesting comparison remains the valuation per user which looks very favorable to LinkedIn. A user on LinkedIn is valued at $52 net of cash. Twitter's users are valued at $78 per share while those on Facebook command a value of $112 per share.
This just shows that while absolute valuations are steep, the relative valuation seems rather favorable. Of course it should be noted that Facebook is already recording very nice profits on its business, while Twitter is actually bleeding cash at a much faster rate than LinkedIn.
Takeaway For Investors
After runaway momentum in 2013 shares of LinkedIn have fallen by nearly a third so far this year to levels last seen at the start of 2013.
Worries about a general momentum and technology sell-off, slower membership growth and concerns about monetization are the main reasons behind the sell-off. Despite a steep sell-off, shares are not obviously cheap despite ongoing growth at impressive rates.
That being said the valuation looks fairly appealing on a relative basis, especially compared to Twitter which could be the foundation of a relative value play between both stocks.