Thursday, February 5, 2015

Linkedin Q4 2014 results

Continuation of my chronicaling the eventual collapse of LNKD's stock value.  Previous entry

Linkedin results seem poor and on its continued path to collapse.  The were masked by a single area of US marketing solutions strength.


  • Break even net income of $3.7M for the quarter, and loss for the year of $15M
  • (at least) 12th consecutive decline in Quarter over quarter revenue growth at 44%.
  • Surprise rapid deceleration of Talent solutions (41% growth) and Premium subscriptions (38%).  Even faster deceleration in the US at 36% and 37% respectively.
  • Marketing solutions was a bright spot of 56% growth sustaining overall wall street expectations, but marketing solutions spike is more prone to be a one time spike in revenue.  The performance was almost entirely due to general US advertising strength. (72% growth)
  • Stock based compensation grew substantially higher (65%) than revenue.  As did depreciation and amortization (also 65%)
  • record low member (25%) and corporate solutions customer (36%) growth. 
  • substantial drop in revenue growth for every region other than US.  With APAC region even more pronounced decline than EMEA.
  • (More expensive) Field sales as a percentage of revenue reached a record high jumping to 64% of revenue  compared to annual average of about 60%.  Online sales channel showed a record low growth of  30% (compared to previous low of 37%)
  • Real operating cashflow (operating cashflow less purchases of equipment) for the year, fell over 80% to $20M from $160M.  That includes the insanely high $320M in stock based compensation that is excluded from cashflow.  So, Operating cash loss for the year was $300M.  The operating cash loss in 2013 was "only" $33M


  • Revenue growth forecasts in continuning substantial decline for the year to below 33%.  With break even $10M operating profit.
  • Revenue growth forecast for Q1 of only 31%, with operating loss of at least  $22M.
  • An extra 5%+ in share dillution is forecast for the year.
  • The break even ($10M) operating profit forecast is prior to $56M in financing costs, and $80M in taxes, and so a total loss forecast of $146M.  Over 10 times greater than 2014.

Difference with last year's guidance

Linkedin outperformed for the year relative to their guidance for the year.  They did so mainly by reversing the trends on monthly visitor growth and page views.  While guidance for next year is about the same as guidance was last year, all of their growth metrics (marketing solutions excepted) have deteriorated from last year.  So even if they beat their own guidance, there's no reason to expect growth above 40%.  They are still riding a wave of internet (and advertising rate) growth that should stabilize over the next couple of years.

The most important metric where linkedin failed, is they still had a loss for the year despite sales being 10% higher than their guidance.  Its proof that they have no profit margin, and may be simply buying sales.

Comparison to Google
Google had 20% growth this year.  Their market cap ($360B ) less net tangible assets ($85B) (=$275B) over sales ($66B) is 4x.  And google has an operating margin before R&D of ($26.3B or 40%), and total profitability.

Linkedin at 33% growth.  $30B market cap less tangible assets of  $2.4B = $27.6B over sales of 3B is over 9x times sales.  Its operating margin before R&D is only 25.7%, and not profitable.

Given that it is not profitable, its hard to give some value to the company, but if 20% growth at 40% margin is worth 4x, a decent way to value lnkd is to give it a sales assumption when its growth rate will drop to 20%.  This can very generously be 3 years from now, 

with 85% sales growth over the next 3 years would make sales $4.1B in 2017.  A 25.7% margin compared to 40% margin for google, would deserve a 2.57 sales multiple instead of 4x, and so generously under $11B market value instead of $30B.  At 130M shares, this means a price target of $80 per share.

But Google has a Price to earnings multiple of 25.  Backing out its $85B in net tangible assets, its a PE multiple of 19.  For LNKD to deserve an $80 per share valuation, in 2017, it would need $500M in "real" earnings per share.  There is no way that will happen, because all of their growth has been and will continue to be purchased at cost equal to sales, even as growth rates rapidly decline.

Linkedin discontinued Quantcast coverage

Linkedin is no longer having its web traffic monitored by Quantcast.  Prior to discontinuing in mid/late January, Quantcast was showing 40% drops compared to early december engagement.

Alexa,com shows a global rank drop to 14th from 10th in the fall.

Facebook competition
Facebook at work is likely to provide long term impact against linkedin growth and profitability.  The main reason to doubt any profitability potential from linkedin, is that if they ever show any, its relatively easy for existing and new competitors to take it away from them.  ie. LNKD has no technological moat that prevents less expensive job matching, nor any real engagement reasons that it doesn't overpay for to stimulate.

Comparison to Facebook
Just as the comparison to Google financials, Facebook is perhaps a better comparison.  FB had over 58% sales growth this year (LNKD 45%).  Net tangible assets of $14B.  And Price (less net tangible assets) to current sales of 15 just like LNKD's multiple to current sales.  The difference is both much higher growth at FB, and real profitability at FB.  FB also has a 61.4% operating margin prior to R&D.

If 58% growth and 61.4% operating margin is worth a price of 15x sales, then 45% growth and 25% margins would be worth at most 4.7x (15 * 45/58 * 25/61.4) sales, and again ($2.219B sales) a $10.5B value.

All of the social media companies enjoyed a good year in advertising rate growth.  Still, that source of growth is also decelerating rapidly for all of them, with 2015 social ad spending expected to grow 19% vs 65% in 2014)

Comparison to Monster Worldwide
MWW is a somewhat similar job matching platform.  It is guiding profitability for 2015, and excluding intangibles charge, lost less than LNKD in 2014.  It trades at approximately its net asset value.  While LNKD talent solutions growth has likely caused MWW's sales declines over the years, the fact that MWW can still be profitable while LNKD cannot, underscore's LNKD poor business model.

Significantly poor guidance

While LNKD usually beats its own guidance numbers, and so they may be set lower than what they will actually deliver, an even greater concern than the mere 33% growth they forecast is the 10x expanding losses, and the sharp deterioration in most of their business segments this past quarter other than US marketing solutions.