On Tuesday, Groupon (GRPN) sold off heavily again, adding further thrust to the downward trajectory of the social media sell-off that has been witnessed this summer.
LinkedIn's (LNKD) Q2 2012 earnings release, however, was rather uneventful. After a moderate sell-off prior to the release the stock shot up to $113 two days later, but has recently pulled back significantly. Analysts praised the revenue beat, and all is apparently well. I personally couldn't have played it much worse; after the sell-off into the low $90s, I hedged my $100 September puts with the $110 calls that expired the Friday after earnings in case of a significant beat. Well, the $110 calls expired worthless, and my nice gain swiftly turned to a nice loss on the entire position. However, the price is slowly finding its way down, so all is not lost.
What strikes me as most surprising is that no one has focused on what I believe to be the most important number -- the number that actually matters to investors, GAAP earnings. GAAP net income has been flat over the last 16 quarters and ranged from -$2.9 million to $6.9 million. This for a company with an $11 billion market cap?
I've discussed LinkedIn's sky-high P/E quite thoroughly, but hadn't yet put too much thought into other multiples. It's a tough job; there are few companies to draw meaningful comparisons from. That said, it wouldn't be prudent to completely ignore a multiples comparison. Below is a list of a few metrics:
PEG (5yr expected)
Monster Worldwide (MWW)
Robert Half (RHI)
Spark Networks (LOV)
Data is based on closing prices as of Aug. 13 and sourced from Yahoo Finance.
The first three industries are those in which LinkedIn derives revenue from through its three distinct solutions. I have included a few dating sites as well, not so much for their multiples' analysis, but more so to draw attention to them in hopes of attaining future insight. Dating sites, specifically ones that entail paid memberships, derive significant revenue from paid subscriptions. I think some additional research should be explored here (I personally am doing this, but would like to hear from others) as I think we may be able to apply findings toward pricing policies for LinkedIn's premium subscriptions.
Anyway, the multiples all pretty much state the same story: LinkedIn is valued significantly higher than many comparable companies. Yes, they are all quite different and most aren't growing like LinkedIn is. However, all we have seen from LinkedIn is revenue growth. There has not been any consistent growth in net income; there has been considerable dilution in equity, and insiders continue to sell. Sounds a bit too familiar to the other social networks that have all recently sold off.
Again, I think LinkedIn is a great company, and it has led that way in the social networking industry in monetizing its site. That said, increased revenue still has not been translated into increased earnings for investors, and I still believe the stock is highly overvalued. I'm eager to hear what others think about this, as well as any suggestions as to what insight can be derived from the dating industry with regard to LinkedIn's premium subscription revenue.
Regarding LinkedIn's recruiting revenue, I think the period of exceptionally high revenue growth may be coming to an end. Specifically, I found an interesting statement in Monster's annual report that I think has implications on LinkedIn's future revenue growth. This builds on the argument I've been suggesting in previous articles (one from July 26 and one from July 27), that LinkedIn may be a good short candidate. In the annual report it states the following:
Monster has traditionally focused on the enterprise market, or those businesses that we consider to be among the 1,500 largest organizations globally. However, we have expanded our focus to include small-to-medium sized businesses ((SMBs)), those businesses with approximately 10 to 2,000 employees that operate primarily in local and regional markets.
It seems that Monster has infiltrated the largest companies, and is now moving on to smaller companies in order to pursue growth. Monster has lost considerable market share after its peak in 2007-08, and it appears this is a last attempt to stimulate growth.
This push to squeeze out further revenue -- isn't LinkedIn already doing this? LinkedIn has already targeted the largest of corporations and is now entering the SMB segment as well. Could this be a sign that growth expectations may indeed be too high?
I also would like to point out that Seeking Alpha contributor Chris Moreno made a great argument for getting short LinkedIn due to the recent revenue slowdown that most analysts missed.
Finally, Monster's NPM has for the most part been low, and has ranged from a high off 11% at its peak in 2007 to a low of -3.5% in 2010. Are we to expect LinkedIn to be any different?
I am holding on to my short position in LinkedIn. However, I may look at hedging my exposure to the general market with a long position in Apple (AAPL). That's because I believe it offers superior upside potential, especially at its current valuation, and has the iPhone 5 coming soon and rumors of an iPad mini.
If we look at the daily chart, LinkedIn has been somewhat range-bound for the last five months. Note, however, that the moving averages are all consolidating quite closely and the stock could be ripe for a big move.
Click to enlarge image.
For a more thorough technical overview of the stock, check out Chris Vermeulen's recent post.