Thursday, April 30, 2015

Linkedin Q1 2015 results

Linkedin is a company worth faily $5B today, that could one day hope to be worth $10B, if it performs perfectly.  Its market value is over $30B.

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.  

Results


  • Loss of $43M.  A record since IPO.  And large enough to wipe out all profitable quarters since 2013.  Their lifetime company accumulated earnings became negative as a result of this quarter.
  • Record low revenue growth rate of 35%.  First quarter over quarter revenue drop in its history.
  • Disastrous talent solutions (main business) slowdown to 36%
  • Collapse of Permium subscriptions to 28% growth.
  • record low mobile unique visitor (and rapidly declining) growth of 38%
  • online talent solutions sales (the only hope of profitable operations) growth collapse to 30%.  They mentioned in passing a slowdown in online jobs.
  • Sharp decline in US and APAC growth to 37% and 40%. Collapse in EMEA and other Americas growth to 33% and 19%.
  • record low corporate solutions customer growth rate to 35%
  • US talent solutions showing its near fully penetrated state with 33% growth
  • For all its products, online sales grew at only 23%.
  • Operating margins excluding R&D went from 25% in 2014, to 23% this quarter.
  • Sales expenses as a % of revenue grew to 36% from 35% last year.
  • Depreciation (costs mostly related to the computing infrastructure needed to serve members) continued its alarming outpacing of sales at 48%. 
  • 51% growth in stock based compensation.  Well above revenue growth.

Guidance:
  • lowered full rest of year revenue guidance by $66M (from guidance last quarter)
  • increased amortization and depreciation expectation by $80M (outrageous difference from last quarter expectations)
  • Will be giving themselves a $40M raise (from guidance last quarter) in expected stock based compensation.
  • A further drop of Profit before all of the above increases of $155M
  • A $288M total loss before taxes and interest for the year (significant record)
  • In Q2, they expect to lose $116M alone.
  • Q2 revenue guidance is for a drastic collapse to 26% growth
  • 7M additional shares to 134M total (by end of year)

Lynda.com purchase

Linkedin is buying Lynda.com for $1.5B.  10 times its $150M 2014 sales.  Presumably it is not profitable, and could account for the sharp drop in guidance.  Lynda.com had an unimpressive 25% (approximate) growth rate in 2014.

 LNKD guides that the integration will reduce Lynda.com sales by  $15M revenue this year (over 6 months).

While there are understandable potential synergies between the 2 companies, they are paying a lot, and most of the synergies will occur by replacing advertising opportunities with lynda.com impressions.  The synergies are not so big as to claim "if only people could be told about lynda.com's great educational content, they will all pay to use it, and force all of their employees to do the same"

The one good thing about the transaction is that $700B of the $1.5B purchase price is being paid in grossly overvalued LNKD stock.  Still at $1.1B "real" cost, it would be expensive, as the earnings potential payback would be well over 20 years, and necessarily has potential failure scenarios.

Other social media results this quarter

Wall street has treated the results of TWTR, YELP, and LNKD as a disaster this quarter.  FB results were poor in that although they earned an extra $1B in revenue compared to last year, they spent $1.5B to do it.  GOOG is the only company that increased its profits over last year.

FB spending so much likely had the result of crowding out advertising opportunities for the "lesser" sites, such as LNKD.  FB and GOOG both represented a continued very healthy online ad market in rates and volume.  

A recent worthwhile article from another site makes a good case that there is a social media bubble the result of startups advertising on sites like FB and LNKD who then point to all of the revenue and market value these companies enjoy as a result of the advertising they are spending, and if they can be worth 1% of FB, then VC money should pay them that much.

There will be a world very soon where online advertising rates do not grow at 30% year over year.  The social media sector is priced (stock market value) as though this world is permanent.

While that is a valid argument against owning stocks such as LNKD, the main reason why it is never worth owning shares in these companies is that they are controlled by insiders who are the only ones with a vote.  They have told you that they will never pay a dividend, and accepting a reasonable takeover offer would prevent them from paying themselves as much as long as possible.  The only way you can make money by owning such stocks is the same way you would have made money with Bernie Madoff:  Sell shares before everyone else does.

Linkedin is worth $5B ($45/share)
because someone would buy it for that much.  There is a very reasonable potential for earning $500M per year one day, when R&D and sales effort is cut back and sales top out around $7B to $10B.

Linkedin could be worth $10B if it performs perfectly
LNKD is on a path to have $10B in annual sales by 2022 with continued overspending on sales and R&D, likely resulting in no profit.  These are the estimates shared by optimistic analysts, with unrealistic high share price targets.  In fact, because LNKD market value is so immersed in the hope for $10B in sales, it will always respond to challenges by overspending to stay on that path, and so it is virtually certain that it will have a substantial net loss cumulatively throughout these years.

It will be 2026 before it can hope to provide $1B/year in shareholder Earnings.    Likely a couple of years later.  But the day it starts making a little bit of money, is also the day that competitors can charge less for the same offering.  Helping people find jobs is the only reason Linkedin exists as a destination, regardless of the expenses it unprofitably undertakes to invent new reasons.  Those marketing and other expenses do give it a "coolness" that attracts users, though the vast majority will only care about its job connecting purpose, and any coolness is as transitory as MySpace's.

The most important risk of all though is that the world in 2026 and beyond is not mapped out.

The wolfs of wall street
In my view, it should be a criminal act for analysts to assign a LNKD price target above  $74.63 ($10B).  No analyst has a forecast (credible or otherwise) for a dividend stream and takeover price worth more than this amount.  It should be criminal because the educational requirements of financial analysts require that they know forecasts higher than this amount are a lie, and any mistaken negligent stupidity of an analyst cannot excuse the organizational responsibility to not defraud their clients and the public.

The reason for criminally high price targets is that there is a story-based appeal to sales potential surrounding a household name.  The wolfs of wall street have the tremendous advantage of knowing how well their bullshit is working, and so they win any game where profits are based on buying before others when the bullshit sounds good, and selling before everyone else when the BS isn't going over well.  Analyst targets based on the taste of the BS level should be criminal.  The wolfs of wall street BS pricing model has always existed and explains the dot com overvaluation spike of 1999.

LNKD management has executed operationally exceptionally well relative to their $45 IPO price.  There is company disclosure that they will refuse to repay shareholders indefinitely.  Wolf of wall street price inflation benefits LNKD management substantially as they are able to pay themselves handsomely, and the company has been able to secure secondary financing at excellent conditions for management.  Unless there is proven kickback links between management and analysts, the criminal responsibility for the inflated price targets should be borne exclusively by the analysts as they have a business model that supports the fraud without requiring the support of management.

So while LNKD management can more easily corrupt company profits and cashflows to themselves, since they tell everyone that is exactly what they will do, as a result of inflated analyst estimates, it is up to the analysts to have their estimates reflect management reality.  Not doing so enables more obscene levels of profit diversion.

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