Just How Bad Was LinkedIn's Outlook?

Summary

• LinkedIn stock got crushed last week, as investors fretted over far weaker-than-expected guidance.
• However, much of this weakness seems to be due to Forex headwinds and acquisition costs.
• With the underlying business still looking fairly healthy, investors may have overreacted to the news.

One of the biggest stories in tech last week was the savage beating incurred by LinkedIn (LNKD). Although the company beat on both earnings and revenue, the outlook for the current quarter came in miles below analyst expectations, sending the stock down as much as 25%. Although analyst target price cuts were quick to follow, some defended the professional social network. Just how bad was the update?

Missing the mark

To be fair, as far as missing analyst figures goes, the numbers were quite spectacularly far off from the mark. Analysts on the whole were expecting Q2 revenue of $719 million, with earnings of around $0.74 per share. LinkedIn, on the other hand, is projecting EPS of $0.28, more than two-and-a-half times less than the consensus, on revenue in the range of $670-$675 million. Investors more or less ignored the solid Q1 results and ran for the exit.

One of the things blamed for the weak guidance was something that's been affecting US companies operating abroad in a range of sectors: the strong dollar. This is generally difficult to take into account in terms of analyst projections, and a number of other companies have missed guidance due to currency impact. LinkedIn expects the additional revenue impact from currency swings to be at around $13 million for Q2 and $50 million for the full year.

The other factor that was identified as a drag on earnings was the recent acquisition of Lynda.com, an online education company. The $1.5 billion purchase is the company's biggest ever, and offers a range of advantages. Jobseekers can easily see which skills they need to pursue a specific opening through LinkedIn's interface, and then get training through the integration of Lynda's videos in the platform. What LinkedIn is probably really after though is the company's user data, which it can use to more effectively target and monetize ads.

The transition towards integrating Lynda.com's offerings with its own platform is expected impact revenue by some $15 million, while Lynda.com will also contribute some $24 million in stock based compensation.

If we add up the impact of the stronger dollar and the costs related to the acquisition, some $52 million in total, we actually get to a figure that is more or less in line with analyst revenue projections for the current quarter. As such, much of the guidance miss seems to be due to one-time items rather than a particularly severe decline in the core business.

In defense

Although many analysts lowered their price targets following the report, most held on to their long-term ratings, as the company's underlying business still looks fairly healthy. Because it is essentially a website for companies and professionals, there are still many untapped opportunities for monetization, and although there seems to be a decline in ad revenue, this is something that other social networks are suffering from as well. Higher spending is moreover expected to contribute to growth in the long term.

LinkedIn stock has a history of reacting sharply to earnings reports, which is not unusual for a high-multiple, momentum driven growth stock. As such, it is likely that the selloff following the report was a bit of an overreaction, and that it will recoup some of the lost ground as investors mull over the company's future growth prospects.

Conclusion

LinkedIn suffered one of its worst beatings in years, down as much as 25% following weaker-than-expected guidance for the current quarter. However, it looks like the poor outlook, at least in terms of revenue, is largely due to external circumstances and temporary costs related to its recent acquisition of Lynda.com, rather than a significant decline in the company's core business, and as such, the selling may be somewhat overdone. Bullish investors could in fact use this recent weakness as a long-term entry point.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.