LinkedIn - Can A Monetization Increase Offset Slower Member Growth?

| About: Microsoft Corporation (MSFT)
This article is now exclusive for PRO subscribers.

Shares of LinkedIn (LNKD) ended Friday's trading session roughly flat. The professional internet network reported its third quarter results on Thursday after the close. Shares opened around $115 on Friday, but closed at $107 eventually.

Third Quarter Results

LinkedIn reported third quarter revenues of $252.0 million, up 81% on the year. Revenues came in ahead of analysts consensus of $244.2 million.

LinkedIn reported adjusted EBITDA of $56.0 million compared to $24.7 million last year. Non-GAAP net income, which excludes stock-based compensation and amortization of intangible assets, rose from $6.6 million last year to $25.1 million. Non-GAAP earnings came in at $0.22 per share, beating analysts consensus of $0.11 per share.

The company reported a net income of $2.3 million, compared to a loss of $1.6 million last year. Diluted earnings per share came in at $0.02 per share.

LinkedIn's professional network now has over 187 million members.

CEO Jeff Weiner commented on the results, "LinkedIn had a strong third quarter with all of our key operating and financial metrics showing solid growth. The last few months mark the most significant period of product development in the company's history. This accelerated pace of innovation is fundamental to our goal of driving greater engagement on the LinkedIn platform."

Segmental Information

LinkedIn's largest solution performed the best during the quarter. The talent solution division reported a 95% growth in revenues to $138.4 million. Marketing solution revenues increased by 60% to $64.0 million. Revenues from the premium subscriptions rose 74% to $49.6 million.

US sales rose 76.1% to $162.4 million, while international revenues rose 97.2% to $89.7 million.


For the fourth quarter of 2012, LinkedIn expects revenues to come in between $270 and $275 million. At the midpoint of the range, this implies year-on-year revenue growth of 62.5%.

Adjusted EBITDA is expected to come in between $58 and $60 million. Based on stock-based compensation expenses of $28-$30 million and deprecation and amortization expenses of $23-$25 million, the company is likely to report a small profit.

For the full year of 2012, LinkedIn expects to generate revenues between $939 and $944 million. Adjusted EBITDA is expected to come in between $202 and $204 million.


LinkedIn ended its third quarter with $677 million in cash, equivalents and short term investments. The company operates without the assumption of debt, for a comfortable net cash position.

The market currently values LinkedIn at $11.5 billion, which values the operating assets at $10.8 billion. Based on the full year outlook, this values operating assets at 11.5 times annual revenues. Operating assets are valued at roughly 53 times annual adjusted EBITDA.

LinkedIn does not pay a dividend at the moment.

Investment Thesis

Year to date, shares of LinkedIn have risen some 70%. Shares rose from $65 in January to highs of $117 in May. Shares fell back to $90 in June and rallied back to $125 in September. At the moment, shares are exchanging hands at $107.

LinkedIn's public debut last year has been a great success with shares doubling on their opening day. The firm aggressively expanded its annual revenues from $79 million in 2008, to roughly $940 million this year. The company reported a $5 million loss in 2008 and is expected to report a modest profit of $15 million this year.

The law of the large numbers simply dictates that LinkedIn's revenue growth is slowing down. First quarter revenues rose 101% on the year before. Revenue growth slowed down to 89% in the second quarter of the year, and 81% in the third quarter. LinkedIn's own guidance implies a 62% growth in revenues for the final quarter of the year.

While the operating performance is impressive, so is the valuation. Shares are valued over 10 times annual revenues, and most of the world's leading business professionals have already set up an account. Key will be to increase the monetization rates per user, which came in at $1.35 per user over the past quarter. Average monetization rates rose by five cents over the past quarter. Subscriber growth is slowing down, so the increase in monetization will be key.

I remain bearish on the prospects for LinkedIn. While I applaud the user growth, monetization efforts, and increased user engagement, I am worried about slower growth. The fourth quarter guidance is little inspiring. Based on the slowdown in revenue, a 50% growth rate in annual revenues for 2013 is quite a challenge. I expect LinkedIn to only achieve this target if monetization efforts continue to pay off. Even in that case, I expect that slower member growth will have a greater impact than increased monetization rates.

I remain bearish on the short to medium term for the stock, but optimistic about the business model.

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