This article explains why the trend of reduced full-time employment is negative for LinkedIn (LNKD). Two more ingredients are a high premium, and a slowdown in revenue. These three ingredients make LinkedIn an ideal short.
LinkedIn: High Premium
LinkedIn is a free resume website which up-sells premium subscriptions to job applicants and recruiters. Like most freemium websites, LinkedIn also sells advertising space.
LinkedIn is expensive. It has a market capitalization and enterprise value around $11BB, a forward P/E around 85, and a similarly expensive EV/EBITDA around 100.
LinkedIn is said to deserve a forward-looking premium because it is a social network. Yet LinkedIn has a bigger premium than the leading social network: Facebook (FB) has a forward P/E and EV/EBITDA in the 30's.
Reduced Full-Time Employment
LinkedIn was founded in 2002 and built its website in a full-time professional economy. But with Obamacare making full-time employees expensive, and software making busy-work human thinking redundant, most of us see the professional economy headed more towards part-time and freelance specialization. Generation X is more tech-savvy and less loyalty-inclined than the Baby Boomers; Generation X is beginning to represent the oldest among work seekers. How LinkedIn positions for this young freelancing trend now predicts its future valuation.
What's happening on LinkedIn right now? Professionals are being asked to endorse each other piece by piece. If the engineer you sat next to in calculus helped you graduate with an economics major, you could endorse her skills in "mathematical calculation". This is helpful because engineers don't do math after they graduate, so her colleagues can't really endorse her on this skills piece. Then again, you can't endorse her on the skills piece "civil engineering", but her colleagues can. Her recommendation letter is thus crowd-sourced. The expressive medium of LinkedIn prevails over the expressive medium of a traditional recommendation letter. She is just one example but you get the point.
It's crucial that LinkedIn deliver on this as the full-time market shrinks. The focus shift to efficient micro-scale professional ratings is inevitable. We are entering a freelance economy wherein knowing "he is good at writing project proposals" is more important than knowing "he is a good manager".
Slowdown In Revenue
Akram's Razor says now is the time to be short LNKD, because there is a slowdown in revenue. The successful adoption of a micro-ratings system on LinkedIn would make Akram's Razor wrong in his short thesis. But I don't think the system is going to succeed, so I think he is correct in his short thesis -- correct as he was proven with Mellanox (MLNX), Buffalo Wild Wings (BWLD), Netflix (NFLX) and Chipotle (CMG) -- to give a few examples among many prescient calls you can verify in his articles.
LinkedIn Ratings Are Too Polite
LinkedIn's skill-level endorsement capability is not an inspirational tool for users to provide critical appraisals of each other. Unlike the scroll of teletype paper inspiring Jack Kerouac's On The Road, LinkedIn will never inspire users to take constructive risks in their expression.
Intelligent interpersonal criticism will never flourish within Facebook-like person-level social networks. Instead these criticisms will emerge on Twitter-like idea-level thinking networks.
Until such a service (probably on Twitter itself) emerges in the professional networking realm, skill-level endorsements will not flourish in an organized manner on the Internet. It is simply too awkward to rank people on LinkedIn.
History has shown that we can be nudged to share more and more publicly, if enticed by the right tools. But looking at the fluffy articles in my LinkedIn news feed, and the vacuous network of acquaintances, I think LinkedIn finds its strength in "weak connections" and will never establish itself across intellectual ones.
Twitter-Like Is Better
Weak connections are useful in winning the attention of a full-time employer while competing against 150 equally qualified applicants. But those 149 competitors are underbidding your hourly rate and it would be more efficient for everyone if you lent your special micro-skills to 3 clients simultaneously. The uncritical, socially inspired endorsement market on LinkedIn is of little use to those 3 prospective freelance clients.
Criticism is something people feel more comfortable doing with a less social, more intellectual expression tool like Twitter, not LinkedIn. If you look at the type of articles that normal people share on LinkedIn, everyone minds his manners and is politically correct. LinkedIn does not inspire candor.
But candor is what our economy really needs for the efficient distribution of skills. LinkedIn can only inspire people to put up resumes and like articles from Fast Company and kiss up to each other. Such is the limit LinkedIn has established for itself while focusing on a steady ascent in paying subscribers.
In both expressive medium and expressive tools, LinkedIn does not serve the trending freelance economy.
The History Of LinkedIn's Defenestration
I would have made this the title, but many social media investors refuse to read articles with "history" in them. Listen, I feel it is almost a fact of history that LNKD will fall out the window.
We should always pay more attention to what is hidden than what is said. Nobody said anything about deferred revenue in the latest conference call. As Akram's LNKD thesis explains, that's because deferred revenue history reveals a deceleration in paying subscribers. LinkedIn doesn't want you to know about it!
Last quarter, with Q/Q deferred revenue coming in at just a hair below 10%, you got your first indicator that LinkedIn's rapid revenue growth was starting to markedly slow, as that number was less than half the 21% average of the previous four quarters. But one quarter does not make a trend, so anyone investing in this stock had to be paying close attention to where deferred revenue would come in this quarter. Well, at a Q3 increase of 8.7% over Q2, a new trend can now be confirmed. LinkedIn's subscription growth is officially starting to rapidly slow down, and with marketing revenue literally flat over last quarter (though this is seasonal - the overall rate is slowing too here). You don't need to be a rocket scientist to extrapolate where overall revenue growth is heading. If deferred revenue has grown at an average of 9.5% for the last six months, that implies that LinkedIn revenue is about to follow a Facebook 2011/2012-like trajectory. Not groundbreaking news when you consider that growth of higher bases obviously gets much tougher, but definitely not want you want to see if you are long the stock at these valuations.
I'll admit I have never liked public LinkedIn stock. But I understand why investors do like it: investors perceive rapid paying subscriber growth. So I have zero confidence these longs are going to have faith and hold LinkedIn when they realize growth is slowing. They didn't buy LinkedIn shares out of faith in the company. They bought the paying subscriber growth.
A high growth premium alone is not enough to short a company. To short, there needs to be a reason for the growth valuation to no longer be deserved. A slowdown in revenue is not always enough either: Amazon's (AMZN) resilient performance so far is proof of that.
The final ingredient in a short is a qualitative problem in the fundamental story. That qualitative catalyst is what I see in LinkedIn's freelance economy potential. Want to bet on increasing growth in full-time professional employment? Then buy LNKD.
I am hereby endorsing all of LinkedIn's executives for their skill so far in selling a broken growth story to the stock market. I will not be surprised by its stock price collapsing 30% or more in 6-10 weeks. For a pairs trade (although unnecessary) consider a long position in Facebook with half the exposure of the LinkedIn position.
Please share empty praise with me in the comment section like you do with acquaintances on LinkedIn; it will look much like the empty comments on my Myspace page in 2006.