LinkedIn: The Perfect Entry Point?

| About: LinkedIn (LNKD)

Summary

The slowdown in global growth has left a mark on many a U.S. company.

One can argue convincingly that over the long run, LinkedIn appears well-positioned to gain further market share.

LNKD’s stock has suffered disproportionately on the heels of the company’s most recent earnings release.

Introduction

The slowdown in global growth has left a mark on many a U.S. company. And LinkedIn (NYSE:LNKD) has proven no exception. LNKD's stock has suffered disproportionately on the heels of the company's most recent earnings release. Yes, the social media giant did announce better-than-expected fourth quarter results. In fact, results registered a "beat" both on the top line and on an EPS basis. Revenues were up 34% year-over-year. Meanwhile EPS of $0.94 beat expectations by $0.16. Most metrics registered improvement as well. Unfortunately, weak first quarter and full-year 2016 guidance sent investor confidence and the company's stock tumbling.

At $101.11, the stock is down nearly 50% since the release. The company's market capitalization now totals $13 billion. Of greatest concern is the fact that revenue growth continues to come under increasing pressure. Management expects total revenues to increase 20% in the current fiscal year. That compares to fiscal year's 2013, 2014, and 2015 in which revenue grew by 57%, 45%, and 35%, respectively. Quite a comedown.

A Quick Overview

LNKD has largely redefined how professionals connect and how recruiters work. One can argue convincingly that over the long run, the company appears well positioned to gain further market share in the approximately $100 billion global online advertising market and the nearly $27 billion worldwide staffing market. Regardless, the pressures facing the company are many. Our greatest concerns follow, in precise order.

LNKD's core Hiring Solutions business continues to be plagued by slowing growth. In addition, the company's Marketing Solutions practice is not without its challenges. Phase-out of the Lead Accelerator product will also weigh on near term revenues. We cannot overlook the nearly ubiquitous pressures on the international front. And that's not all. Expenses continue to increase as well, led by rising stock compensation. Today, the line item is non-cash, but it may eventually come back to haunt the company via common shareholder dilution.

Fortunately, the picture is not entirely bleak. LNKD's core products remain strong. In addition, the company's product pipeline is robust. Positive developments relating to Sales Solutions and Lynda.com cannot be ignored. In addition, management appears to be extremely disciplined from execution and resource allocation standpoints.

Valuing the Stock …

How do you assess LNKD's obvious "disruptive" value? Reasonable arguments can be made-despite events of the past two weeks-that the company has barely scratched the surface of what it might achieve. Unfortunately, valuation metrics suggest that the company's stock might still be overvalued relative to other leading and faster growing social media companies. As a result, despite the stock's recent drubbing, and notwithstanding our positive view of management and favorable longer term outlook, we remain neutral on the stock.

Valuing the Bond …

LNKD's 0.50% Convertible Senior Notes due 2019, the company's sole convertible bond issue, has reacted as one would have expected. Specifically, the bond declined 10%, roughly 25% of the stock's recent sell-off. In contrast, nearly one year ago, when the company's stock was reaching new all-time highs of around $270, or 23% above the stock's price when the convertible was issued a few months earlier. At the stock's peak, the convertible was going for around 114% of par. That's about 60% of the stock's upside.

Sound roughly familiar and appropriate? Well over half the upside in contrast to less than a quarter of the downside? Maybe not quite as snappy as the old two-thirds/one-third refrain, but you get the point. And for those who've given up all hope on the convertible-arbitrage business, this event should have been a bit of a tonic. If you had a reasonable hedge around 60% going in, and were patient about buying back shares, you should have had a payday of five points or so.

With respect to the company's 0.50s due '19, our HOCS slash line measures 63 Overall / 53 Growth / 81 Safety, attractive scores for such a large market capitalization company, especially one still very much in growth mode. However, the middling growth score balances still-strong revenue growth (fourth quarter revenue growth of 34% and 11% in the year-over-year and sequential quarterly comparisons, respectively) against a conversion premium over 150%. The safety score reflects the company's still large market cap. Furthermore, the score benefits from the robust market cap relative to total debt leverage. More broadly speaking, the market's being quite punitive to convertible issuer types. Yet, not all of them enjoy LNKD's staying power. That said, there are plenty of reasons to see this as a better and better entry point. Thus, at current levels, the LNKD 0.50s due '19 are extremely attractive.

Disclosure: I am/we are long LNKD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.