Shooting from the hip: LinkedIn Knocked Out
On Friday 1 May about $7
billion evaporated from the LinkedIn market valuation. That is a lot of money.
It manifested in a 20% drop in the share price, although at times the share
traded down more than 25%. Enthusiasm is not what it was.
One way of looking at a share
value is to compare the price to the earnings of the company. This is the Price
Earnings ratio (PE ratio) and historically, over the very long term, it has
averaged at 17 for all of the S&P 500 Index. To give an idea of where LinkedIn
sits, its PE ratio is currently over 500 and has been higher than 2100 during
2014. With a loss of $0.34 per share in the last quarter, you are paying a
great deal of money in the hope of future growth and profit.
Source: nasdaq.com
It is this future growth
that many reports have previously mentioned. They spoke of revenue growth,
earnings growth, unique visitors, ROI and growth in members which now stands at
364 million and is 23% higher than last year.
But the detail that appears to have
rattled the market last week, is the poor guidance on future revenues. For the
second quarter of 2015, the company expects earnings of $0.28 per share, on
revenue of $675 million. By comparison, analysts had projected earnings of
$0.74 per share on revenue of $718 million.
For the full year 2015, LinkedIn
projects earnings of $1.90 per share on revenue of $2.90 billion. Analysts
expected earnings of $3.03 per share on revenue of $2.98 billion.
Advertising
accounts for only 19% of LinkedIn revenue. It is very evident that for long
term viability this contribution must grow massively. Worryingly the
contribution of advertising has remained virtually flat, rising only from 18%
last year. While Talent-Solutions, their recruitment arm, provides the bulk of
ad revenue, and has grown, Display Ads have fallen steeply most notably within
Europe where they almost disappeared. Taking up some of the slack was Content
Marketing which also helped keep the total ad component of revenue flat.
LinkedIn’s results last
week were interim results. Full year results will come later in 2015. But the
forecasts are amended sharply downwards and this did not sit comfortably with
investors and shareholders.
But the feature that
remains most worrying, certainly to the old school clique, is that LinkedIn
does not make money. And by that we mean profit,
not revenue, that is available to shareholders as dividends. After last week it
appears more unlikely in the immediate future to make any profit at all. If a
business loses money, even 1 cent a day, day after day, it will eventually die.
That is a fact. LinkedIn does not make money and it does not pay its
shareholders a dividend. It’s a waiting game.
Last week revealed the
fragility of this waiting game with similar downward forecasts and sharp share
price corrections occurring for both Twitter and Yelp. It was, in short, an
interesting week with three major tech companies reporting downbeat interim results
almost simultaneously.
In this new evolving
digital era it is clear that not all current players will be equally lucky. The
real battle lines have yet to be drawn. There will be many more successes and
failures as the industry moves beyond infancy. There will also be consolidation
and efficiency gains with the victors emerging stronger than before.
Many see the current share
price declines as a buying opportunity and maintain that these tech giants will
successfully monetise their reach in time. In contrast there are others such as
Dan McCrum of the Financial Times that take a more jaundiced view: What may be different this time are downward
moves for some of the larger tech stocks prompted by disappointment around
earnings, indicating genuine reassessment of the potential for these companies to
take over the world.
