The recent quarterly earnings silenced LinkedIn's (LNKD) critics. The professional social network firm posted reported earnings per share of $0.02, beating the consensus estimates of loss per share of $0.05. Excluding special and off-items, reported earnings would have been at $0.22 per share, also beating consensus estimates of $0.11 per share. Here are some slides for those investors who are interested in digging deeper into the recent figures.
For the current fiscal year, it is expected to post $0.72 per share. This is a big jump of 105% compared to the previous year. For the next 5 years, earnings are expected to grow by 64% a year. For guidance, LinkedIn sees fourth quarter revenues of $270 million to $275 million and operating income of $58 million and $60 million. For the full year 2012, it raised its guidance from $939 million to $944 million from the previous range of $915 million to $925 million. Meanwhile, its operating income is expected to be from $202 million to $204 million. This is higher than the previous operating income guidance of $185 million to $190 million.
Given the current analyst estimates, it is obvious that analysts are optimistic over LinkedIn's prospects. Analysts expect that LinkedIn will continue to post continued operating momentum moving forward. Over the last 2 years, LinkedIn doubled its revenues but posted year-on-year decline in the bottom line. For the last year alone, revenues grew by 114% from the previous year. But, operating margins have declined from 8.1% in 2010 to 4.9% in 2011. This suggests that the company is still in an investment phase to improve its revenue visibility for the next few years. This in turn translates to earnings per share declining from $0.17 in 2010 to $0.11 in 2011. Since the market puts more weight in the recent quarterly numbers, this is the reason why it is optimistic over Linkedin's prospects in the coming quarters.
Improved Site Redesign Leads to More Usage
LinkedIn has rolled out a complete redesign of its profile pages for its members. This allows more customized profiles for each member. It also allows each member to connect with others in their network easier. For the third quarter, it has now 187 million members, an increase from the previous quarter's second quarter. In contrast, Facebook (FB) has one billion monthly active members and Google (GOOG) + has around 400 million members.
The new profile page is a result of a series of launches over the past three months. It involves a new homepage, notifications, endorsements, and influencers. This translated to good results as this has increased the usage of the site. In fact, the company said that it now gets 25 million views of its profiles each day and around 175,000 new user profiles are created. The main new feature is the live stream content on LinkedIn's home page that includes more relevant and customized content. It has also added new features such as endorsements on people's skills and Facebook-style notifications, resulting in increased social interactions between users.
In terms of business segments, talent solutions generated $138.4 million for the quarter. This accounted for 55% of the total revenues and an increase of 95% from the previous year's quarter. Separately, marketing solutions posted revenues of $64 million, an increase of 60% compared to the same period last year. The segment contributed 25% of the revenues for the period. Finally, premium subscriptions contributed $49.6 million, equivalent to 19.7% of total revenues. This also translates to an increase of 74% compared to the same period last year. Looking at these segmental results, LinkedIn is definitely firing on all cylinders.
Its social network peers have also posted good results. Facebook announced that the company generated $1.26 billion in revenue. There is a reason to be optimistic as the company is adapting to its fast growing mobile user base. Advertising revenue grew 36% to $1.08 billion, of which 14% or $139 million were from the mobile devices. Social network games developer Zynga (ZNGA) reported net loss of $52.7 million, an increase of 3%. Despite slower results, investors are convinced that the company has a solid vision for future. The company has allocated $200 million stock buyback program, indicating its confidence on the company's future.
The main advantage of LinkedIn over Facebook is its source of revenues. More than half of the company's third quarter revenue came from selling professional services to businesses. This is the kind of market that would support higher margins for LinkedIn over the long run. But, competition for this professional service is currently brewing. Branchout has launched a Facebook application that also targets professional users. It allows users to see which of their Facebook friends work at specific companies. Unlike LinkedIn it does not require users to build a professional network one person at a time. Also Google+ announced that its profiles for business. The product is now ready for users who have activated Google Apps for business with a monthly fee of $5.
Valuations Still Expensive Despite Good Prospects
The stock is currently trading 102 times forward earnings. On a price over growth ratio, it trades at 0.9 times. Even the stock's other metrics point to an expensive valuation. It is valued at 13.9 times and price over sales of 14.3 times. It seems that other social network stocks are also valued higher. Facebook is valued at 34.8 times earnings and has price over growth ratio of 1.1 times. It also has trades at 3.2 times book value and 12 times sales.
Other peers in the industry like Equinix (EQIX), a business that connects people with partners and customers worldwide through its platform trade at more than 40 times earnings and has a price over growth ratio of 1. In terms of price to book ratio, it trades lower at 4.3 times. Also its price over sales is at 5 times.
I believe that the estimated growth of social network stocks such as LinkedIn appears exaggerated. While it is true that LinkedIn commands a dominant position in the emerging online professional service, competition is picking up. Technology heavyweights like Google and Facebook have enough firepower to launch a strong competitive campaign against LinkedIn. Time will tell whether LinkedIn can withstand this kind of environment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.