Why LinkedIn Is Getting Better
LinkedIn (LNKD), the corporate social network, has dropped over 20% this year despite reporting strong financial growth of late. In the recently reported second quarter, LinkedIn posted robust growth in both its top and bottom lines. In fact, the company's revenue was up 33% from last year, while net income increased to $71 million from $63 million last year.
The improvement in LinkedIn's financial performance was a result of increasing customer engagement on both desktop and mobile. LinkedIn had enhanced its popular desktop and mobile products last quarter, witnessing nearly 60% year-over-year growth in feed commitment and search traffic expanding at a significantly faster rate.
But, LinkedIn shares have dropped despite the company's strong growth in key user metrics, and this is surprising. However, this could be a buying opportunity for long-term investors.
Talent solutions are growing at a robust pace
LinkedIn is witnessing robust year-over-year growth in unique visitors, and helping members to get hired is increasingly emerging as one of its quickest expanding verticals. The number of visitors accessing job-related pages is growing steadily at about 40% on a year-over-year basis during June as against nearly 10% during January.
Further, the recently introduced Job Search app has gained over 3 million activation, up from about 1 million in the first quarter. This notable growth is mainly due to the growing scale of jobs on LinkedIn, with nearly 4 million active job listings till date as against approximately 1 million last year.
As such, the robust top line growth of the talent solutions segment signifies the increasing engagement of professionals with the online professional networking portal.
A look at the weaknesses
As a result of this strong growth, it is not surprising to see why analyst Eric J. Sheridan at UBS reiterates a "Buy" rating on LinkedIn with a price target of $230. He is primarily encouraged by the strong bottom line growth of the company. However, several other analysts have been discouraged with LinkedIn's guidance, which indicates a drop in revenue and profit in the latter half of the year.
This is not surprising as the professional-networking website had missed sales projections in the second quarter and lowered its annual guidance for net revenue, primarily driven by the strengthening U.S. dollar. Weaker ad spending and the complete internal restructuring of the organization were certain factors that lowered LinkedIn's revenue by an extra $30 million. Particularly, the weaker expenditures on display advertising for the quarter were cited as the primary reason for lowered top line growth.
However, the moves that the company is making in order to improve its business indicate that the weakness might be short-lived.
LinkedIn recently closed the acquisition of lynda.com and successfully added over 6,800 courses to the platform through the addition of 280,000 videos in five different languages. This acquisition will help LinkedIn improve its financial performance in the long run as the company has added another vertical to its business.
Overall, investors are advised to buy LinkedIn shares due to its impressive growth prospects. LinkedIn has a significant cash position of $3.03 billion as against a smaller total debt of $1.10 billion. This means that the company has enough resources that will allow it to invest in both organic and inorganic growth in the long run. Additionally, LinkedIn has a forward P/E ratio of 52, while it doesn't have a trailing P/E ratio. This indicates that the company's bottom line performance is expected to strengthen going forward.
Hence, investors should use LinkedIn's weak financial performance as an opportunity to buy more shares.