Linked in Q4 results - Should see collapse in stock price

I am running a series on linkedin results, updated each quarter.  Predictions from the last article mostly came true.

Q4 results

• Revenue growth fell under 50% at 47%
• Profit almost breakeven at $3.8M
• Drop in Quarterly comscore pageviews and unique visitors
• Year over year page views up only 8%, and unique visitors year over year up only 20%
• Diluted shares outstanding skyrocketing to 125M.  Up 10M from last quarter.
• Linked in recognizes premium subscription fees over 4 quarters from time paid, and this quarter marked the first sharp drop in growth rate, and so signals further decline.

2014 guidance

• Revenue growth of only 30%
• Loss of over $60M
• 65% increase to stock compensation over already absurd $194M level to $325M

Comscore vs. Quantcast data

Although comscore shows deterioration, Quantcast shows even worse results for Q4 and the beginning of Q1 2014.

• Unique visitors per week were, as with comscore, slightly higher than 2012 in the quarter until december, but up less than 20%, and down considerably from this summer.
• Page views were down sharply for most weeks.
• For January, visitors are down slightly from last year, and mobile visitors are down 25%.
• For January, page views are down over 10%, and mobile page views down 40%.

The worrying point for declines in January and Q4 is that at the end of Q4 2013, LNKD has 37% more members than it did at the end of 2012.  So visits and pageviews per member is collapsing.

Linkedin's troubles and future strategy

Linkedin was designed for professionals, and nearly all professionals have made a linkedin account, and so it has limited growth opportunity in the segment of people that have some use for linkedin.  Even with those people that have some marginal use for it, many are disappointed by linkedin's aggressive marketing email policy, and not clearly understood use of their contacts.  Joining linkedin can feel like handing over your contact information to viagra marketers.  Just like growth in a viagra email list doesn't provide any obvious profits to the viagra emailer

Because their market is saturated, they are now padding membership numbers with kids (so they may link to universities).  They have committed themselves to try to sign up all 3B labour force members of the world, at great expense and yet another year of no profitability.  The strategy will not only be expensive, but its not clear that linkedin will provide any value to non-professional members, even if they are tricked into signing up, and its not clear that employers of non-professional fields will find any value in conducting hiring through social media. 

How to value LNKD

Linkedin is worth far less than the $25B reflected in a $200 share price.  In order for it to be worth as high as $10B ($80/share), you need a theory that it can make $1B/year in profits sustainably for say 50 years.  Such a theory could support a leveraged buyout at around $10B.  Without such a theory, that LNKD is one day profitable, then it's a mere stock scam, since its corporate structure has no accountability to outsiders, and it will not choose to pay dividends.

Before it can make $1B sustainably, it needs to make $1B, and the next question is at what sales level it could achieve such a target.  Note also that profit means GAAP profit.  Not EBITDA bs.  Depreciation is a constant expense for LNKD associated with data servers.  Its generous stock based compensation has no reason ever to be reduced because insiders own most of the shares, and they enjoy unopposable great benefits from the policy.

LNKD's current income from operations margin is 3%.  It was 6% last year.  Maybe they could cut a bit of marketing and G&A costs, and achieve a 20% margin, and so $5B in sales could support a $10B company value.  If sales go up 500M per year after 2014, the the sales level could be conceivable in 2020, but its most likely those sales will be achieved, as usual for linkedin, at maximum aggressive expense. 

So, if everything goes well, it will take a few more years past 2020 for LNKD to reach profitability close to supporting an $80/share price.  The sustainability for a web site to maintain that profitability is questionable.  There was arguably never anything wrong with Monster Worldwide.  LNKD just outspent it to take its market share, riding the coat tails of a stock scam.  If it one day makes money, a fresher stock story will be appealing to take it down.

Back in the distant past of Q4 2012

After Q3 2012 results showing 81% sales growth, and the same to better profitability than it has been showing recently, the stock hovered around $100/share for the next 2 months.  LNKD does not appear at all to be healthier than it was then.  Whatever optimism supported $100/share then shouldn't support a higher share price today.  Especially not with 10% more shares outstanding.

The only reason for enthusiasm back then was the belief that sales growth for LNKD would be perpetual and easy.  With a 30% growth forecast this year, a 15%-20% growth forecast for 2015 is optimistic, and  an expectation of return to high growth, completely unreasonable.